Market forces and confused strategies

“Dad, I’m confused about the ways of the government.”

“It’s the prerogative of governments to keep their citizens guessing, Son – a kind of perpetual exercise to keep people mentally agile, I guess… But what have they done now, to befuddle your little brain?”

“They have increased the price of electricity but brought down the price of petrol, Dad.”

“Come on, Son. Don’t attribute everything to the government. At this rate, you’ll be blaming them for the thundershowers next. Prices of some things are controlled by a force that is more powerful than even the government.”

“You’re kidding me, right, Dad? You don’t say God determines the prices of certain things..?”

“Oh, He does, Son – in His own subtle way. But I’m referring to market forces.”

“Market forces, Dad? You mean those hawkers in Pettah market who force you to buy things you don’t need?”

“Cut out the wisecracks, Son. I’m talking about fundamental economics here – the forces of demand and supply, and how they determine prices of goods.”

“I thought Price equals Cost plus Profit, Dad..?”

“Yes, as a mathematical formula, that is correct, Son. It costs more today to generate and transmit a unit of electricity, and that cost increase has been passed on to the consumer, resulting in higher electricity tariffs… That is why the price of electricity has gone up and …”

“So, Dad, are you also saying that petrol prices have gone down because it costs less to produce a litre of petrol than it did in the past?”

“Don’t interrupt me, Son… No, that is not the case. I was coming to that – the forces of demand and supply: When the demand for a commodity (which is the quantity asked for by all buyers) is more than its supply (the quantity that all sellers are willing to sell), prices go up.”

“And what if supply is more than demand, Dad?”

“The opposite happens, Son. Prices come down, which is what has happened in the case of crude oil and petroleum prices. Giving the government a proverbial pat-on-the-back for that is like giving credit where debit is due!”

“Hee-hee-hee! Is this discussion leading somewhere, Dad?”

“Remember, Son, that when you see the prices of certain commodities rising or falling, it may just be because the international price of that commodity has risen or fallen – and we happen to import that commodity.”

“So, what influences international prices then, Dad?”

“Almost anything, Son. You’d be surprised… Demand for crude oil and petroleum products, and therefore their price, can be influenced by something as isolated as weather patterns and how cold the winter is expected to be in the US. The colder weather results in higher demand for heating fuels that come from petroleum products. Higher demand, higher prices…”

“The North winds doth blow and we shall have higher prices... That’s a chilling thought, Dad!”

“…Or whether OPEC nations, in a rare moment of magnanimity, decide to increase crude oil output, thus increasing supplies to this fuel-guzzling planet and bringing down the price of petroleum.”

“May such moments of magnanimity increase! Are you saying that the government and public sector companies that sell petrol can do nothing about it?”

“I’m not saying that, Son. Instead of buying petrol at prevailing spot prices, we should be buying better – doing some forward trading, and dealing in futures and options. By doing so, the country can reduce its risk and bring about some stability in petrol prices… Then, there’s local taxation that also impact the domestic price.”

“Heavy stuff, Dad. But why this focus on petroleum products?”

“You started it, Son… and petroleum products are a big item of imports for us. But the same demand/supply principles apply to many other commodities. Take diamonds, for example. There’s an organisation called De Beers that controls and restricts supply of rough diamonds, to keep prices high…”

“A gem of an idea, if ever there was one. What say, Dad?”

“Yes, Son… And gold mining companies also determine how much bullion to supply depending on the international price of gold. When prices are high, they dig deeper.”

“That’s a 24-Karat strategy too, Dad. But there are some things for which supplies cannot be controlled, no? Like fish and vegetables that get spoilt if stored for too long.”

“Very true, Son. As my buddy Benjamin used to say, ‘Fish and visitors smell in three days.’ But even these can be extended to some extent by refrigeration and preservation.”

“I must warn our visitors, Dad…”

“Huh..? Hey, Son..! You know what I meant.”

“Just kidding, Dad.”

“Son, do you know what the most perishable item of daily use is?”

“What, Dad? Time?”

“Hmmm… How true, Son. But I was thinking of something else… See that chap? He’s just paid twenty-five rupees for his daily newspaper, but – when tomorrow comes – it won’t even be worth the paper it’s printed on.”