Wednesday, October 7, 2009
A point of intersection?
The notion that markets set prices is generally quite a good one. However, the symbol that is often used to present this idea (two lines meeting on a graph) is a rather poor descriptor for the true mechanics of this concept. When a buyer and seller meet in a free market they do not meet at a Euclidian point where supply and demand intersect each other precisely. Instead, they meet within a range. The buyer is willing to buy at any price below a certain level, and the seller is willing to sell at any price above a particular level. They do not meet exactly, instead they have wiggle room--sometimes more, sometimes less. If their respective ranges do not overlap no exchange is possible, if they do then they must settle on a price within that range. But how is the actual price set? Just as no exchange is possible without overlap no exchange is possible without a specific agreed upon price. Enter skill. Negotiation must now take place, with the greater share of the range going to one or the other party. It is no longer a question of how much is wanted or available, but how well each party can fight for a better deal (within the relevant range). With this view in mind, the lines of supply and demand cannot be said to meet at a point, but rather in a fuzzy zone with an exact place to be worked out without regard to desire or capacity to provide. Exchange is not accomplished through a physics like process that produces a certain and necessary result. Instead, it is the result of art constrained by differing values between parties. To claim that price is merely where supply meets demand is to ignore the necessarily human--and subjective--element that so greatly impacts economic exchange. This point is sometime washed over by speaking of a large market of millions of actors, but price is always unique. Each exchange is a particular, singular event, the negotiations of which are influenced by the other transactions, but never exactly set by them. Although it can be pointed towards (and is a useful concept) the market price--in reality--is nowhere to be found.
Posted by GI Blogger at 12:51 AM