Shameless Profit

I was browsing the lifestyle section of the RooshV Forum the other day, casually reading up on business ideas. Most of the ideas on there seem flimsy at best, with the majority being able to net me less money than my day job, and probably with more effort involved to boot.

I did, however, found one idea interesting. You fill a storage unit close to a tornado ridden county in the US with the type of product that are at a premium in the aftermath of a tornado. You wait for tornado season, then go there and flog off all the petrol generators, plywood ect at a massive markup. I don’t live in the US so this isn’t one for me, but it seems like a good concept to make oneself a little windfall. It’s simply using a massive spike in demand relative to supply to make a healthy profit. Good business.

Then I read something that perturbed me. Doing this is actually illegal in many states. It’s an act that is known as price gouging:

Price gouging is a pejorative term referring to a situation in which a seller prices goods or commodities at a level much higher than is considered reasonable or fair. This rapid increase in prices occurs after a demand or supply shock: examples include price increases after hurricanes or other natural disasters.

The fact that this is illegal ignores one of the basic concepts in economics. The relationship that supply and demand has to price. I believe that price is derived from two things:

  • The value which potential buyers place on an item
  • The current level of supply of an item, relative to demand

Note that how much an item costs to produce doesn’t factor into the equation directly. I say directly because the cost of producing an item may influence price indirectly by influencing supply (items that are cheaper / easier to produce may be in more plentiful supply as people are more able to supply them). This means that there really isn’t such a thing as a ‘fair’ price. Fair implies a morality dimension to calculating prices, where non exists. People may say it’s unfair that a petrol generator costs $400 the day after a hurricane when it only costs $100 the day before. I disagree. The $100 price was based on a certain supply : demand ratio that no longer exists, hence the $100 price is no longer valid. Comparing the $400 price to the $100 is only human, as the human brain often judges the world based on comparisons, rather than absolutes. This is just a flaw in one of the human brain’s heuristic judgement mechanisms, not unfairness that should cause a law to be created.

I’m all for making shameless profit. Why am I ok with taking advantage of other people’s needs to make money? Simple. It’s how all business and employment works. Your local supermarket takes advantage of the fact you need food in order to make money from you. You take advantage of your boss’s need for a certain type of labour by being paid to provide that labour. The only time I’m against someone profiting is if they’re misrepresenting what is on sale. Take ‘advantage’ of people that lived in an area hit by a hurricane is just the same. The thing is people react emotionally to things like this, not logically.

I’ll leave you with a quick story to illustrate how most people view profit as something unfair and evil. I was in a shop near my house one day, when I saw a young man complain to the shopkeeper about the price of a bottle of coke. The shopkeeper has accidentally left the whole sale price on the bottles. Turns out if you buy 4 bottles, the price per bottle goes down to half the price that the shop are selling the cola for. The lad was saying it was unfair that the shopkeeper was charging double what he paid for them. The shopkeeper managed to calm him down buy telling him of all the costs his business incurred that had to be factored in to the price. “Oh”, the youth said. “That’s ok, thought you might have been profiting”. I find it almost unimaginable that many people don’t realise that not only do businesses try to make a profit, it is there main reason for existence. He’ll charge as much for that coke as he thinks most people will by it for. How much it cost him to buy has no bearing on what he’ll charge for it (or it shouldn’t do).


One thought on “Shameless Profit

  1. Pingback: Money, Money, Money | Sigma Lifestyle

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s