Greetings from the Last Homely House! Winter break is winding down - we start back on the 24th, so I’ve been getting my syllabi ready. I really needed this break after last semester. Now I rested and recharged and I’m looking forward to seeing the kids, and I’m excited to teach Health Systems again this spring. I’ve been doing a lot of thinking on how I want to update that course and I’m starting to entertain the idea of writing my own textbook for the course. My goal would be to create it on the web and make it free to download. We’ll see.
So this week I wanted to talk about demand curves. Assuming you took basic microeconomics with me (or, sadly with someone else) you would remember that the demand curve is a downward -
Hey - wait! Where are you going?
Come back - I promise this will not be painful. OK - let’s start another way:
Your mother probably told you that you were one in a million. But there are two ways of looking at that statement. The way your mother meant it was you are so special, that out of a million people, you are the best one. You are a very special snowflake. Another way to look at that statement is the opposite meaning - the cold, cruel world version that slaps you upside the head once you start going to public school - you are indeed one in a million, with no difference between you and the other 999,999 other people - and no one cares because you are completely replaceable. You are not a very special snowflake because snowflakes aren’t special. A snowflake is just snow.
The first meaning of one in a million - the mother’s version - in economics would be called a differentiated product. This means that there is something special about you that makes you different and people value that difference. Now to be fair, some people value your difference, and maybe even value your difference quite a lot, but some people just don’t see what your mother sees, and see your difference as useless, or even annoying and bad. That’s what it is to be a differentiated product. With a commodity, everyone values it the same - it’s just a matter of how much they want. With a differentiated product, some value it a lot, some value it very little. At the market level, there is a limit to how much is actually demanded.
Let’s look at these two ideas as graphs - and I promise I’m getting to the philosophical point here shortly. Here’s a graph for a differentiated product:
Note that the demand curve slopes downward because there are different values for each unit of a differentiated product. What this means is some people put a high value on the product and some people put a lower value on the product. What is important is the triangle above the price line. That triangle represents the excess value that the buyers put on the product. A bigger area means the buyers received a lot of value from the product they bought. We call this consumer surplus. The bigger the consumer surplus, the happier the consumers are. The more unique the product is, the more some people are going to value it. Extremely unique (i.e., differentiated) products are one in a million in the way your mother meant it.
Holding the quantity constant, if you rotate the demand curve down so that it becomes flatter, you can see there is less consumer surplus.
The thing that makes the demand curve become flatter is the availability of substitutes for the product. I drink a lot of seltzer (this is where many of the can tabs in the picture above come from). I’m relatively indifferent about which brand of seltzer I drink, and there are a number of brands that I can choose from at the grocery store. So my demand curve is relatively flat. Instead of being one in a million, there are many choices, and I don’t perceive much difference between them.
In the extreme, where there is no differentiation, you arrive at a perfectly flat demand curve. Products like this are commodities. Commodities are undifferentiated products that are typically sold by weight or volume because as long as the quality of the product meets a minimum standard, no one cares about the producer. Think of bushels of corn, barrels of oil, or ounces of gold. If you sell me a bar of gold, all I want to know is that it is actually gold. I don’t want to hear how hard you had to work to get it out of the ground, or the sophisticated processes you used. I just want to know the bar is pure, and how much it weighs, because I’m most likely going to do something with it, like make dental implants or semi-conductors. Let’s let Duke & Duke explain:
(That’s from the ‘80’s classic Trading Places. )
What this graph tells you is for all possible quantities, the demand is always the same at some price P. For example, as I write this, West Texas Intermediate (WTI Crude) oil is selling for $80.07 per barrel, while gold is selling for $1,923 per ounce. (source: https://www.cnn.com/business/markets/commodities/ - prices change constantly, so don’t expect to see the same numbers)
This means you could buy one barrel of oil for $80.07 for one thousand barrels for $80.07 - quantity doesn’t matter - the price is the price - because oil and gold are commodities.
Notice the lack of consumer surplus. There is no triangle of value because no one feels they are getting anything special with a commodity. No one would be willing to pay more for a commodity than what the market price is because a commodity is one in a million in the second sense - that there are millions just like what you have to offer and no one cares.
So here is the philosophical point: which one in a million are you? Do you create value by providing something unique and special? Or do you grind along doing what everyone else does?
We are both, of course. You are one in a million to your mother and your friends and family because they appreciate you for who you are and there are no substitutes for you. That is hopefully a given.
What about in the workplace? Do you provide some unique value to your organization? Do you do something special that no one else can do? Do you come in and create value (a big triangle of consumer surplus)? Or do you just do the minimum?
How do you think when you are at work? Do you ask yourself, how can I do this differently so that it will add value to the organization? What else can I do to add value?
Also, even if your mother already thinks you are one in a million, you can still think about ways to differentiate yourself positively to her, and to the rest of your friends and family. We can’t do this in every aspect of our lives, but we can try. Life is too short to be a commodity.
(The one in a million idea came to me this week while I was working on my photo above. My wife and I are doing a photography “project 365”, which means we are trying to take a picture every day for a year. I usually wind up doing my picture in the evening, which means I’m banging around the house looking for something to turn into an image. We save can tabs from my seltzers and other sodas we drink to give to a friend who recycles them. I poured out the tabs on the table and started messing around with them and discovered the one blue tab. That tab made the composition by being different from the rest, and that got me thinking about differentiation.)
And that’s it from me. I’ll be back Wednesday with links. As usual, willing good for all of you!
Thanks for reading and see you next week! If you come across any interesting stories, won't you send them my way? I'd love to hear what you think of these suggestions, and I'd love to get suggestions from you. Feel free to drop me a line at mark.bonica@unh.edu , or you can tweet to me at @mbonica .
If you’re looking for a searchable archive, you can see my draft folder here: https://drive.google.com/drive/folders/1jwGLdjsb1WKtgH_2C-_3VvrYCtqLplFO?usp=sharing
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See you next week!
Mark
“The meaning of life is to find your gift. The purpose of life is to give it away.” – Pablo Picaso