When analyzing how a product is made and the labor put into producing it, we are able to understand why the product is priced at what it is. As our society demands their needs, entrepreneurs work hard to produce the right number of products, while making a profit themselves. Sometimes, the products that our society wants may become unavailable or limited, so the cost for it goes up drastically. In fact, sometimes, depending on the value that a product has to an individual, they are willing to do nearly anything to get it.
In this chapter of Bylund’s book, the analogy of Adele selling apples is expanded, and the process of production is discussed. Throughout this chapter, Bylund expresses that for Adele to determine the price at which she will sell her apples, she must account for how they are produced. For example, Bylund (2016, pp. 32-33) demonstrates the procedure of production: land, labor, capital, and time. He states that Adele must consider how much the land that she uses for growing the apple trees costs, the work she puts into planting and harvesting the seeds, the factors that are included during production (like fertilizer and water), and lastly the length of time it takes to grow the apples. Each of these components cost Adele a certain price, whether it is time or money, so when determining what price these apples must sell at for her to earn a profit, everything must be taken into consideration. I agree with the points made in this chapter because I have personally gone through these stages when trying to sell used clothes. First, I needed to make sure the clothes I am selling are clean. Then, I had to take pictures of all the clothes so I could post them to a selling website or resale them at a store. Another consideration I had to keep in mind was how much it would cost me to ship the clothes once they sold if the buyer was from online. If I drive to a store to sell them, I also need to account for the gas and time it takes me to drive there. All of these factors play a role in the lowest price I will accept for a certain piece of clothing, so that I make sure I get value from my effort, the item and I am still able to make a profit.
Another concept in this chapter is the “Invisible Hand” effect that is explained by Adam Smith. This idea shows how prices will change over time due to the volume of resources produced. Bylund (2016, pp. 40-41) explains that if there is too much of a product, then it will be cheaper. And if there is too little of a product, it will be more expensive. I also agree with this concept because I see it in our society today. A recent example of this is when TikTok star, Alix Earle, went viral for her makeup routine. Girls around the world were watching her videos and going out to the store to buy the products she used. Entrepreneurs that created these make up products did not account for them to go viral through a person, so they rapidly sold out of these products. When the entrepreneurs produced more, they increased their prices to achieve greater profits and limited the amount produced so that customers would be willing to pay more for these popular products. It is stated that,
“It is important to understand that production is continuously adjusted to better meet customer demand- that is to satisfy wants” (Bylund, 2016, p. 43).
This quote is exactly what happened with Alix Earle on TikTok. The “invisible hand” of an influencer shows a viral example of how entrepreneurs produced more of the products that everyone wanted.
In this secondary reading, the ideas stated in the primary reading are supported and expanded in the way sellers use knowledge. Referring to the Alix Earle example, knowing how too much demand created a scarcity of makeup was the first step. Additionally, knowing that individuals will pay overprice for popular items is another major consideration. Throughout the reading, it is expressed that it is not necessarily the scientific or statistical knowledge that overcomes a problem, but knowing how society and individuals think determines the actions they will take. For example, Hayek uses the tin example of when tin is scarce, prices go up, and individuals pay more for this resource. Knowing that individuals are willing to pay more for their goods, no matter the cost, because they highly value them, is essential. It is stated that,
“All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere, and that in consequence they must economize tin” (Hayek, 1945, p. 526).
This quote shows that the individuals who valued tin were not going to be able to possess it unless they were willing to pay premiums to have it. And knowing that somewhere else in the world found higher value in the product, were willing to pay for it, those were the people who got it. Personally, if the product that I use daily or needed to live went in short supply, I would pay for it overpriced or drive out of my way in order to have it in my possession.
The controversy in our marketplace is that the way in which entrepreneurs set prices is typically not hard to justify. Yes, they do change the prices of the products based on how much it costs to produce them, but they also change their prices due to society's demands. Our society’s threshold for what they will pay fluctuates because some products come in and out of value based on trends.
Bylund, P. L. (2016). Chapter 3: What Prices Communicate. In Seen, the unseen, and the unrealized: How regulations affect our everyday lives (pp. 27–45). essay, Lexington Books.
Hayek, F. A. (1945). The Use of Knowledge in Society. American Economic Review, 35(4), 519-30.
