The idea that supply and demand determines price is one of those economic models that sounds good on paper but is less than accurate in real life. Certainly, I have spoken of supply/demand countless times in another context but more so that buyers determine the price of everything.
Demand determines price. A few years ago there was a health scare that caused people to stop buying pork. The price of chicken went up. There was chicken-supply problem for a few days but the price still stayed high as buyers were willing to pay a higher price. Pork supply never changed, but prices went down because there were fewer buyers.
You could say that supply exceeded demand, therefore, influencing prices, and that is true. However, it was demand that changed, not supply.
The only way that “chicharon with laman” can sell for P1,000 per kilo is because that is the price—maybe the highest price—buyers are willing to pay. I am not an expert on making chicharon, but I bet the profit margin is relatively high so that a 5-percent increase in production cost would not necessarily mean a 5-percent increase in the retail price.
Price inflation comes from a variety of causes, but most price increases that we experience are because the seller thinks that the buyer will pay a higher price. If sales then drop, the price is usually lowered.
Deflation is the decrease of the general level of prices in an economy. Governments, financial institutions, and the financial media “talking heads” that spread the propaganda are all panicking about the fact that prices of commodities and certain finished goods are either not going higher or are going down. They should panic because deflation is the clearest proof global economic policies in the last decade are a total disaster.
Prices are in deflation because people are not spending. Stock markets are in “deflation” because people are not buying stocks. People around the world are hoarding cash.
Remember when local gasoline prices were skyrocketing in 2007-2008 and some were stockpiling— hoarding—gasoline? They thought that their stockpile of gasoline would be worth more tomorrow.
People are now hoarding cash because they think their cash will be worth more tomorrow. If you knew local stock prices would be 10 percent lower in a month, would you buy shares today? Buyers determine price and if there is little buying, prices of stocks, crude oil and chicharon will go lower.
But governments go absolutely crazy if price deflation occurs because the politicians lose their lifeblood and power—taxes and other revenues go down. Japan now has officially gone to negative interest rates, which mean eventually it will cost a person to store money in a bank. Governments now want to move to a cashless system so they can force people to spend or just take the money away. You have less to worry about from a robber with a gun than you do from the government.
Here in the Philippines, though, deflation is not and will not be a problem. Maybe it’s because we like
chicharon too much. However, a little cash hoarding right now is not a bad idea.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.