Use the 'Law' to Save Thousands
The Dollar Stretcher
by Gary Foreman
gary@stretcher.com

      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 website 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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