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Use
the 'Law' to Save Thousands
by
Gary Foreman of The
Dollar Stretcher
It's
a law that could save you thousands of dollars. Yet many people
feel that they can't understand it. But the basic economic law
of supply and demand is easy enough for anyone to understand.
Let's
see how economics affects our daily lives. We'll begin with our
jobs. Junior is about to head off to college and doesn't know
which major to pick. Naturally he'll try to find something that
he likes. But it's also important to learn a skill that will
help him find employment after he graduates.
The
first question he'll need to ask is whether there will be demand
in five, ten and twenty years for the skills that he'll learn.
For instance, personal computers have decreased the demand for
secretaries and bookkeepers. More demand means a more secure
future.
That
doesn't mean that Junior should avoid every field that has a
small need for people. It's possible that no one is entering a
specific field. In that case he might do fine. The trick is to
find a career where the demand for employees is greater than the
number of trained people available.
The
benefits of careful career selection will follow Junior for
years. Take the time that he gets a puny raise. If his skills
are in demand he can shop around for a new, higher paying
employer. But, if there's little demand for his talents, Junior
will be left without any real options.
Next,
let's look at one of the best illustrations of supply and demand
at work - auctions. Whether it's an old-fashioned estate auction
or one on the Internet the same forces are at work. We all know
the basic auction game. You put something up for sale and it
goes to the highest bidder. The more bidders that are interested
(more demand) the higher the price. If, on the other hand, two
or more similar items are offered (more supply) then prices will
be lower. Internet auctions are popular with sellers because
they attract more buyers.
Last
year's run up in gasoline prices is another learning experience.
Crude oil prices had gradually decreased for years. OPEC
controls much of the world's oil supplies. They decided to cut
production. That set up a situation where demand for oil stayed
the same but the supply decreased. The result? The highest crude
oil prices in a decade.
But,
there's a second lesson on supply and demand to learn from gas
prices. It's something called 'elasticity'. Think of a rubber
band. It stretches because it's elastic. Items where the price
effects the amount of demand are considered to have 'elastic'
demand.
Economists
recognize that demand for some items will decrease if the price
goes up. Take our gas example. When gas prices went up you
decided to join a car pool. That's elasticity in action. But
there are some errands that you can't avoid so your SUV is still
on the road a certain minimum number of miles each week. That's
in-elastic demand.
Meanwhile
back to our friends at OPEC. They held oil prices artificially
high while we cut back on our gas usage. But, generally people
weren't trading their bigger vehicles for more fuel efficient
ones. Yet. So before people got concerned enough to trade for a
smaller car, OPEC decided to increase production a bit. That
will increase supply and reduce prices. Their hope is that
slightly lower prices will keep us from buying a fuel-efficient
car, which would reduce demand for years to come.
So
how do you use the law of supply and demand to your advantage?
You look for mismatches that favor your side. If you're a buyer
you want to be able to make your purchase when there are more
sellers than buyers. Suppose you wanted to buy some winter
clothes. You'll get a better buy shopping off season.
Or
maybe you're looking for a new car. Fall is the time to shop.
Once vacation season is over there are fewer people car
shopping. That means less demand. Dealers have brand new models
and last year's leftovers still on the lot. That's more supply.
Who's more likely to come out ahead? The buyer should have an
easier time.
Let's
move to the seller's side for an example. Suppose you want to
sell your three bedroom home.
The most likely buyer will have children. They would
prefer to move when the kids are between school years. So most
of them shop in the summer. You guessed it! The demand for your
home will be greatest in the summer and that's when you'll get
the best price.
There's
one final area of supply and demand for us to examine. That's
the demand for money itself. Yes, there's a supply of money
that's controlled by the Federal Reserve Board. And all of us,
both consumers and businesses, create a demand for that money.
The
'price' of money is the cost to borrow it. The greater the
demand for money the higher will be the interest rate. If
there's not much demand for money you'll see lower interest
rates.
So
how do we fit into the equation? We have the ability to affect
the demand for money. Let's suppose that you fall in love with a
red convertible. The dealer is willing to finance it but at
current interest rates the payments are too high. In effect
you've just lowered the demand for money by the cost of that
car. On the other hand, if you decided to buy it, you'd be
increasing the demand for money.
Try
another example. Your credit card balance keeps inching up each
month. The bank has just increased the interest rate that they
charge you. What's happened? They've figured out that your
demand for money is increasing.
If
you have available credit on another card, you can transfer your
balance. That's possible because there's another supplier
anxious for your business. But, if you can't find another source
for the money, you'll be stuck with the higher rate (i.e. higher
price).
If
you keep your eyes open you'll find lots of areas where supply
and demand effects your financial life. By paying attention
you'll see opportunities to save or make money.
Gary
Foreman is a former Certified Financial Planner and purchasing
manager. He currently edits The Dollar Stretcher web site and
newsletters. You'll find hundreds of free articles to help you
stretch your day and your dollar. Visit today! www.stretcher.com/save.htm
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