No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Four: Supply 87 Since the contribution to your utility for even the first AirPods was only equal to what $500 could have purchased in other goods, and the going rate is $800, you should sell. Of course, as we saw in chapter 3, expectations of future prices affect demand; however, let’s assume the utility you receive from your beloved AirPods is less than what could be purchased for $800. In this case, you could increase your total utility by selling all of your AirPods and using the proceeds to purchase other items. So now, you are not a demander of AirPods, rather you have become a supplier from your existing stock. This is not the only way someone can be a supplier. Consider the previous scenario. Let’s say you were watching TV and heard the news minutes after the sabotage. You, being the music freak you are, know the importance of AirPods to music. You realize this is going to be terrible, especially with Christmas shopping season approaching. The light bulb goes on! You raid your savings stash of $2,000 and head down to the electronics superstore in town and purchase 8 AirPods Pros. When the price goes up as you expect you will sell them for a profit. At $1,000 each (for new in-box AirPods), you will make a profit of $6,000 on your $2,000 investment. This is arbitrage : you profit by buying in a cheap market and selling in a dear (or expensive) market. This is the heart of entrepreneurship: someone sees the opportunity to purchase inputs that are undervalued by the market (in the mind of the entrepreneur) that can be transformed and sold for a profit. The transformation may be as simple as buying in one location and selling in another; it could be buying in one time period and selling in another (speculators routinely do this); it could be buying labor and raw materials and using them in an entirely different way that the market values more highly. But the entrepreneur is both alert to these opportunities and willing to bear the risk of loss (and therefore gain the potential reward). This last aspect of entrepreneurship and arbitrage (transforming inputs into more profitable outputs) is what we commonly think of as production, and is the final and most common avenue for supply. In our AirPods example, assume for a moment that there are no monopoly protections such as patents and copyrights. What do you think would happen when Apple’s AirPods factories were sabotaged? Other companies might decide to reconfigure their factories and workers to sell AirPods as well. Especially if they thought they could do it faster. Perhaps you might go into the AirPods production business yourself if there were no legal barriers to entry. As you can see, every demander is potentially a supplier—if the price is right. Likewise, every supplier is potentially a demander if the price is right. For instance, when the gold price was extraordinarily low in the late 1990s, some gold companies actually bought physical gold to hold for later sale when the price was expected to rise. A much more frequent example happens when larger companies acquire smaller companies when prices are low (when the smaller companies are undervalued relative to their future potential). This is the same as becoming a demander for the product, since they demand the whole company and its produce. Arbitrage: the act of buying in cheap markets in order to sell in expensive markets.