My Kids and I Had the Talk -- About Supply and Demand

EXT. STREET — MORNING

Gorgeous spring day with smokeless, cloudless skies, lush green foliage, and colorful perennials in full bloom.

A middle-aged father — bum-kneed, decaying, wistful — escorts his children to the “green playground with the huge climbing structure” in an expensive, exquisitely engineered Dutch cargo bike.

While navigating the sparsely populated streets an expansive cemetery comes into view. The father’s daughter — inquisitive, loquacious, seven — asks a macabre question.

DAUGHTER

(Cautious)

Dad, are there actually dead bodies buried in that cemetery?

FATHER

Yep. Someone’s body is buried under each of those tombstones. Many people find cemeteries creepy, but I really enjoy them. They’re quiet, peaceful, have beautiful landscaping, and encapsulate tons of history. Walking around a cemetery is actually quite nice.

DAUGHTER

The trees are very pretty.

And Dad, does everyone who dies in Chicago get buried in that cemetery?

FATHER

No, definitely not. Chicago is a massive city, and that cemetery is way too small to fit everyone who wants to get buried when they die.

Nowadays, most people get cremated, which means their body is burned and reduced to a small pile of ashes. Even better, many people have started composting their bodies, which turns them into fertilizer and helps the environment.

That sounds pretty cool, huh?

DAUGHTER

(Excited)

Definitely!

FATHER

But, some people prefer to have their bodies buried. Maybe it’s a family tradition. Or part of their culture or religion.

DAUGHTER

(Assured)

I bet everyone who wants to get buried, wants to get buried in that cemetery.

FATHER

Maybe. But it’s really expensive to get buried there, so not every family can afford it.

DAUGHTER

(Incredulous)

You mean it costs money to get buried?! Even when you’re dead?!

FATHER

We still live in America, right? Everything costs money in America. Even death.

SON

(Not lucid)

Zom-beez go RAWR!

DAUGHTER

(Still incredulous)

How much money could it possibly cost to dig a hole in the ground?!

FATHER

(Ready to drop knowledge)

It’s not the digging that costs a lot of money. It’s the land.

Remember, millions of people live in Chicago, and even though it’s more spacious than other big cities like New York or London or Hong Kong, lots of people are competing with each other for a limited amount of resources.

In economics there are terms called supply and demand that help explain how markets behave, and how the prices of goods and services are determined.

Supply measures how much of a thing there is, or can be produced. And demand measures how much people want the thing in question.

When supply is high, and demand is low, things are really cheap. When supply is low, and demand is high, things are really…

DAUGHTER

Expensive!

FATHER

(Didactic)

Exactly.

So, for example, if a thousand people want to get buried in that cemetery, but there’s only twenty spots available, then whoever owns the cemetery — probably a cynical real-estate investment company — can charge a super high price for each space.

In this case, you’d say demand far outstrips supply.

Make sense?

DAUGHTER

Yep.

FATHER

Let’s consider a simpler example, just to be sure.

You know how, once it gets warm, the ice cream man parks his truck outside your school every afternoon? Why do you think he does that?

DAUGHTER

(Enthused)

Because everyone wants ice cream!

FATHER

You got it.

DAUGHTER

(Mopey)

Except, you never let us buy ice cream from him.

SON

(Not lucid)

Zom-beez wan eeet ice cwream!

FATHER

(Unflappable)

That’s true. And we’re never going to buy ice cream from him, because he charges four dollars for one item. That’s outrageously expensive, and a terrible value. We could walk two blocks down the street to Target and get the exact same ice cream for one dollar.

But, lots of other parents do buy ice cream from him, which means demand is…

DAUGHTER

High!

FATHER

Correct.

Now, here’s where it gets complicated. It always gets complicated, because humans are complicated, so let’s break it down in steps.

What’s the ice cream man’s main objective?

DAUGHTER

(Disgusted)

Ugh. To make money.

That’s all anyone cares about. Money, money, money, money, money.

FATHER

That’s capitalism for you. But, the way our society is structured means everyone needs money to survive, so we can’t begrudge the ice cream man for trying to make a living. He needs food to eat, and a safe place to live, and treats for his kids too, all of which cost money.

If the ice cream man’s objective is to make as much money as possible, then he needs to figure out three things. First, how much ice cream he can fit in his truck, or how much supply is available. Second, how much ice cream people want to buy, or how much demand there is. And third, how much he should charge for each unit of ice cream.

The fancy way to say this is: the ice cream man needs to determine the price where supply meets demand, and maximizes his profit.

Now, imagine the ice cream man charged one dollar for each ice cream. At that price, even I’d be like, “Sure, we can get an ice cream for a buck.” Demand would be insane, and the ice cream man would exhaust his entire supply.

But, the ice cream man doesn’t make his own ice cream, and the ice cream doesn’t magically appear inside the ice cream man’s truck.

Some industrial-scale food manufacturer has to make the ice cream and then sell it to a wholesaler. The wholesaler then ships the ice cream on a refrigerated truck to a warehouse, which sells to all the local ice cream vendors. Our ice cream man buys ice cream in bulk to build inventory for his business, and then resells individual ice cream units to depressed parents on the playground for a massive markup.

All those steps cost money, and get baked into the price of each ice cream unit.

Now, for simplicity, let’s assume the ice cream man buys each unit of ice cream for one dollar. If he then sells each unit of ice cream for one dollar, how much money does he make?

DAUGHTER

(Tentative)

Two dollars?

FATHER

Nope, that’s Ponzi scheme math.

How much money you make is called profit. If the ice cream man bought one ice cream unit for one dollar, he generates negative one dollar of profit. If he then sells one ice cream unit for one dollar, he generates positive one dollar of profit. If you combine those, how many total dollars of profit does he have?

DAUGHTER

Zero!

FATHER

Correct.

And this is key. At a price of one dollar per ice cream unit, the ice cream man could sell his entire truckload of ice cream and still end up with zero dollars of profit.

The ice cream man wants to make as much profit as possible, so what should he do?

DAUGHTER

Raise the price of his ice cream!

FATHER

(Enthusiastic)

Exactly.

Let’s say he ups the price to two dollars per ice cream unit. Maybe he sells his whole truckload, and now makes a profit. But demand still far outstrips supply, so he leaves profit on the table.

At three dollars, maybe he doesn’t sell all the ice cream, but he sells most of it. There’s still more profit potential.

At four dollars, maybe he sells around half his ice cream, and supply and demand seem pretty close.

But at five dollars, maybe a lot of people say, “You know, that’s just too expensive.” He sells fewer ice cream units, and generates less profit.

My guess is the ice cream man — or the ice cream cartel he’s a part of — experimented with different prices, and determined four dollars was the profit-maximizing price.

It was low enough to get parents to cave and buy ice cream for their annoying, whiny children, but high enough to ensure the ice cream man — or the ice cream cartel — maximized profit.

Got it?

DAUGHTER

Got it!

SON

(Not lucid)

Gawd-it!

[The trio arrives at the “green playground with the huge climbing structure.” An ice cream truck is parked conspicuously out front.]

FATHER

(Wondering if reality truly is a simulation)

Speak of the devil.

It’s a beautiful day, and spring is finally here, and it’s finally warm, and people are out and about, and this neighborhood’s ice cream man is looking to capitalize.

But we understand how supply and demand work, right? And how supply and demand influence prices, right?

And we know buying ice cream from this ice cream man is a terrible deal, right?

SON

(Not lucid)

Da-ad, can wee bye sum ice cwream?

DAUGHTER

(Craven)

Yeah, Dad, can we buy some ice cream?

Please.