Invisible Paint Brushes rock Circulation: 192,452,302 Issue: 646 | 22nd day of Hunting, Y16
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The Myth of Supply and Demand


by rider_galbatorix

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A Neopian can't simply talk about prices of something without coming upon the words supply and demand. Almost every time prices come up these words are uttered, as if they're some sort of magic explanation for everything. Whenever prices go up and down and someone asks about it, that person is merely told, 'It's simple supply and demand,' and left at that.

Well, I have some shocking news for you all. Supply and demand is flawed. I'm not saying that the idea has no value at all, but that there are a lot of problems with it. So while the idea of supply and demand is pretty much always unquestioned, this article is devoted to seriously pondering the idea and exposing its flaws.

First of all, just what is supply and demand? As you can probably tell from the name, it is a theory that says that the price of anything (essentially anything that can be sold for neopoints or an equivalent currency) is dependent on two things, supply of the item (how many of the item that there is available to buy. Note here that supply doesn't talk about how much of the item there is, only how much there is on the market to buy. For example, if there are a million Lost Desert Paint Brushes in total, but out of those all but ten are locked away in safety deposit boxes, then the supply is just ten) and demand, which is how many people want the item and also how much they're willing to pay for it. There are a number of questionable assumptions with this theory, though.

First off, it assumes that supply and demand are independent of each other (otherwise it would be called either supply or demand) but in a lot of cases, as I'll elaborate on, this isn't true.

The second problem is that there is absolutely no way to measure either of those two quantities. There is no way to measure supply or demand like you can measure price. Just imagine this for a moment, a certain user notices that the price of an item X has decreased by some amount, so he/she goes to the boards to ask around. Some one posts that the supply has increased (or demand decreased). But how can you be sure of either of those terms? How can you possibly know that supply or the demand has increased? After all, you could probably go ahead and try to come up with a theoretical reason why supply or demand has changed, but what is that based on in the first place? It's all based on the fact that prices have changed. So we're all basically measuring supply and demand, which are supposed to affect price, solely from the price of the item.

That sort of sounds like a Puppyblew chasing its own tail, and that's because it is just like that. It's a circular definition, so we can't ever really know what supply and demand are, except, based on this theory, from the price itself.

The third problem is that the theory assumes that every single Neopian works in a perfectly reasonable way. To put it simply, let's say that TNT releases a new kind of morphing potion one day. No one knows what the price is initially, but I think that it is worth 50,000 neopoints. Someone else thinks it is worth 75,000 neopoints, and so on and so forth. According to supply and demand, while it is possible that one of us might be wrong about the price, or that a lot of us are wrong, if we take all the prices together we will get the right price.

And that's the thing, this is the unchallenged assumption of supply and demand theory. I can see why it is so widespread, because it makes a whole lot of sense. But that doesn't prove it is true.

Now, I think by now a lot of readers are probably going to say, "But of course you can't prove that it is true!" And they are right. You can't ever really prove that supply and demand is valid since no one can really measure supply and demand.

But then again, there's nothing saying that it isn't true. And some people are going to point out that, "Well, the theory works, doesn't it?"

What they mean by this is of course, that the theory of supply and demand works in explaining why items around Neopia are priced like they are. But there's the fallacy here, like I've explained before, there is no way to measure either supply and demand. Sure, you can go ahead and try to give logical reasons to explain a price, but you can never really prove them.

For example, let us say that there is a plot prize that has been recently released, say, the Abandoned Water Tower Stamp. Its initial price is 80,0000 neopoints. An inquiring user wonders why the price is so high and goes to the neoboards to ask why. A user says that the demand is high because people want to buy it as an investment and supply is low as have been released as it is a new daily. Now, this can end right there, and it usually does, but let's say the user asking the question is curious as to a new question. How can the other user possibly know what the supply and demand are for that item? Sure, you can say that since it has been just released the supply should be low, but you certainly haven't really measured it And as for the demand, how can you possibly know how many users want that item? Sure, the argument put forward that they want it as an investment makes sense, but that certainly doesn't make it true.

Say an hour later the price drops to 70,000 neopoints. Some might say that it falls because more of it was released, so that confirms supply and demand, right? But let's say that two hours later it goes up to 90,000 neopoints. What then? (And no, I'm not posing a hypothetical scenario here, the price of the Abandoned Water Stamp did fluctuate much like that.) Then, the same inquisitive user asks a question as to why it is fluctuating. Someone answers that the demand must have gone up as more people wanted to invest in it. But then we hit the same problem here, how do we know that the demand has gone up? If the price had lowered, we would have probably guessed from supply and demand that demand had decreased. This sounds a whole lot like the Puppyblew chasing its own tail scenario I described above.

In other words, no one knows the supply and demand, except from estimating them from the price. Supply and demand are never used to estimate the price, rather, both supply and demand are estimated from the price. So sure, you can check out the price of the item and put forward something that makes sense with some other information that you have to try to explain the price, but through this whole process you have to assume that supply and demand are correct. Without that, the whole theory collapses.

Despite this fact, though, almost everyone accepts supply and demand as a proven rule. I guess it is because it just makes so much sense in a way and fits with some things. But there quite a few things where it doesn't, which I'll list below.

Supply and Demand Are Not Uncontrollable

Whenever someone says supply and demand, it almost seems as if it is some sort of magical force that just happens. It isn't. Both supply and demand for an item are controllable. An item can be retired from the shops, be made useful for an avatar or an event (like The Coincidence event), or mass released just to name a few factors.

In other words, supply and demand aren't just two things that somehow just exist, they depend on several factors and this is usually what a lot of Neopians can use to make neopoints, for example with investing in items and selling later.

Supply and Demand Are Not Independent

One thing that you have to assume while applying supply and demand is that the two, supply and demand, don't depend on each other. Otherwise, it would just be called supply and supply or demand and demand instead.

Both of these aren't, and the reason for that is that more expensive items are seen as rarer, and consequently more valuable. Not only that, if the supply of an item is low it might even be seen as a worthwhile investment increasing demand, and if the supply increases people might think that the price will go down so they might as well sell it then, lowering demand. Likewise, if you increase demand for an item then the number of items available for sale decrease and vice-versa. Take for example the Spotted Paint Brush. Suddenly, TNT released the Spotted Gelert and since it was a nice looking pet many Neopians wanted it. This increased demand, and more Neopians used up the paint brush, decreasing supply for it.

So, often, you can affect the supply of an item by changing demand, or vice-versa, which does damage the theory since that means that they aren't independent.

Prices Aren't Set Up Through Supply and Demand

I've heard the following, or something close to the following, several times on the boards, mainly after and during The Coincidence event:

"Stop complaining about prices! Prices are set up through supply and demand, one or both of them changed, and that caused the prices to change, simple as that. The market dictates the price for an item."

We only need to think about this for a second to realize that this is false.

If you suddenly got an item through a random event, how do you price it to sell it on your shop or auction or trading post? Do you look up the supply and demand somewhere and price it based on those calculations? Of course not, because measurements don't even exist for either of those parameters.

Instead, what you do is look up what other people are asking for the same item, either on the shop wizard or the trading post. And, like I've mentioned before, price is a way to measure supply and demand, supply and demand are never used to measure price. So, the statement that prices are set up through supply and demand are false. Let's assume, that just for an instant, an item was overvalued or undervalued. People would still price it the same looking at the other prices.

Of course, prices are affected by the market, but that doesn't mean that they are dependent on supply and demand.

Price Stickiness

Here I'm going to mention something that happened to me. One day, I noticed that Darigan Quetzals looked pretty neat so I bought one for 100,000 neopoints. After a time, my interest shifted and I decided to sell it. I checked on the trading post and noted that the lowest price was still 100,000 neopoints... but there was someone asking for 150,000 neopoints. I waited to sell, and when there weren't any other prices on the trading post, I placed mine for 150,000 neopoints. It took a few weeks to sell, but sell it did. A while later, I saw that a Darigan Quetzal was again being sold for 100,000 neopoints.

This isn't that uncommon with items that are just beyond being valuable enough to put on the shop wizard. So where does supply and demand fall here if someone paid a higher price?

Of course, supply and demand has its own defense to this. We all know that you can pay varying amounts for a certain item, after all, if you snipe a codestone for 1 neopoint, that's not what its price is.. You can also mistakenly overpay for item, like on the auctions and such. Supply and demand assumes that the correct market price will always be toward the median of what the prices paid for it are, because it assumes that as a whole, the market always knows what it is doing. What is this based on? Nothing. It is just an assumption.

So here it is that we come to price stickiness. It's just the tendency of things to remain at the price they have been. People tend to price things as they have always been. However, prices are usually slow to change, and that's why it is called 'sticky', unless of course something major happens like an upcoming plot.

Supply and demand, if they even work, are assumed to be dynamic factors. They change almost every single day. But that doesn't mean that prices change every day. Think about it; both supply and demand must change every day, even every single second. But prices don't change with every slight fluctuation, that's why it is called 'price stickiness'.

Overvalued/Undervalued Items

An interesting point with supply and demand theory is that nothing can be overvalued or undervalued, since at every single point in time, supply and demand are dictating the price.

So then how can you say that something is being priced too high? After all, you can't really measure supply or demand, the only thing that you have is the price to go by. Take for example the Mystery Island Aishas Stamp.

I can't prove any of this, but I can argue like some of the supporters of the supply and demand theory argue. Think about it, so few collect stamps, and the thing is that the majority of those who do probably already had the stamp, and still it is stuck at 100,000 neopoints on the trading post and is a hard to sell item. So, I think that the price of this item is too high. But of course, I can't prove it. I just gave you a logical argument, but that's all that it is, there is no way to prove it, and I could probably think up of other arguments that are equally valid.

Another thing is that supply and demand don't distinguish between real supply and demand and fake supply and demand. I'm saying that demand to purchase an item to use it is real demand, because that's what really drives the price. But then again, lots of Neopians, myself included, buy so that they can sell later at a higher price. This is usually insignificant compared to the actual demand, but I suspect that in some cases like that of the Abandoned Water Tower Stamp the false demand is more than the real one. You know you have a problem when the majority of people buy something only with the intention of selling it later, speculation is bound to end and prices certain to collapse.

To sum things up at this point, there are two main things that I would like to say:

1. Supply and demand aren't magic laws. The prices of items just don't go up one day without any other forces on the scene, so simply saying supply and demand as a reason isn't going to work.

2. There's nothing backing up this theory of supply and demand. Then why do so many people believe in it? I think it is because the idea is so simple, and of course we all like simple things, not to mention that it does make sense somehow. Plus, no one can really disprove it completely, and in a way it makes sense if you use the prices to measure supply and demand, but the theory states that technically you should be able to do the opposite, but you can't. So, supply and demand hardly answer all the questions that we have about the Neopian Economy.

 
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