Understanding The Laws Of Supply And Demand

Before I went to college, I thought there was one law of supply and demand.  There are actually two laws: One law of supply, and one law of demand.  Supply and demand may be interrelated, but when you look at the laws you are looking from two different viewpoints.  One as the consumer and one as the supplier.

If you sell a product that is in high demand, you can sell it for a higher price and will not see a decline in sales.  The higher you go in price, the more demand will drop off, until it drops off a cliff (i.e. no sales).  You will want to price where you make the most overall profit, which will be some mathematical formula where profit per item times units sold will be the greatest amount.  For some items, a small change in price will eliminate sales; for others it takes a large change in price for sales to drop off.  This difference is called the elacticity of demand.

If you are the purchaser or consumer of an item, supply will tend to drive your price.  The more different vendors you can buy from, the greater the supply of an item, or your ability to substitute another item will give you leverage to get a better price.

As a reseller of an item, your best bet is to buy an item in plentiful supply to you that is in great demand in the marketplace; so much so it outpaces the retail supply.  If it is difficult for other businesses to enter this market and sell to the consumer, it is better for businesses already servicing the market.  If you can be in a market where all of these things happen, you’ll have a perfect storm that will create a whirlwind of profit.  However, this is pretty rare so don’t hold your breath… you just want to look for the best possible situations that work in your favor.

Please review the following resources for more information:

The Socratic Method – Critical Thinking Part 6

I think this is going to be it for Critical Thinking, for now at least. The Socratic Method, in the most basic sense, is about learning by asking questions. It is also about challenging facts, viewpoints, observations, and courses of action by asking many questions, often leading to better information, knowledge, and solutions. Here is an example of the Socratic Method:

“What color is this shirt?” “Black.”

“Does the tag say the shirt is black?” “No. The tag does not give a color.”

“How do you know the shirt is black?” “It looks black.”

“Have you compared it to an object that is factually black?” “No.”

“Could the shirt be Navy Blue instead of black?” “It could be. I have a navy blue tie I’ll compare it to.”

After comparing the shirt to the tie, the shirt was black… However, it really could have been navy blue because your brain will often simplify colors. The questioning above is irritating, and probably pointless in this case, but it leads to more factual information. The person being questioned settled on his or her answer because they really had a preconceived notion by looking at the shirt, and could have been wrong.

The Socratic Method is often used at the university level to teach rather than just throwing around information because people really learn the material when they are engaged by questioning. We always had written questions we had to answer and we would read through and evaluate our answers before turning them in, because they often caused lively debate among the students. People disagreed, had their own opinions, and debate would ensue. Debate is good because it takes into account many points of view.

Learning about the Socratic Method is a good idea, because challenging information and conclusions will lead to better business decisions. And we all know what good decisions lead to… more money. What do you think?

Please review the following resources:

Is Your Information Good? Critical Thinking Part 5

If you are a conspiracy theory buff, you may not want to read this. Because… the internet is host to some very bad information. You can definitely find the answer to any question, in fact several very different answers, but many answers are just crap. The internet is a repository of very, very good information and absolute crap. So how do you know the difference? Well, Bob’s Web Site says that President Obama is from Venus and was brought here with other aliens. True? That fails the simple crap-o-meter. I’ve read recently that it’s a sin to be poor. True? You be the judge.

On this blog, I try to be practical and publish nuts and bolts information about business but other folks publish psychological mumbo jumbo about attracting wealth and other crap. Now, I admit that there are certain psychological traits you need to be successful, but it’s not all you need. So I tend to preach good solid skills instead since there is so much of the other stuff around. A good solid skill like determining the reliability of information. And one rule is, if it generally smells like crap, it probably is.

On the other hand, there are people who disagree about the source for global warming. Some say people have a pronounced effect and others say that it is a natural occurrence. The two sides thus probably disagree on a course of action. One side says go green, the other side says do nothing. Much of what I have read says there are some scientists that disagree that people cause most global warming, but the vast majority believe it does. Therefor, what we cause we can correct. Am I buying in to what the liberal media is selling? Or is this factually true? Let me know what you think. When you encounter information that disagrees but both sides seem viable, it really becomes a judgment call. And I can tell you that the media is not always right, believe it or not.

Your best source of information will always be the information you produce yourself, or primary data. Secondary information often publishes the results of primary data and attempts to interpret it. Many times there are multiple interpretations of data, so you have to be careful. Many times there will be so many interpretations of what the facts represent that you must really do a lot of research to come to your own conclusion.

I personally like consulting psychics for information… how about you? Ok, before you take me too seriously I have to say that some information, as true as it may be, cannot be trusted. You got Planet X out there that’s going to collide with the Earth in 2012… How do I know? I’ve got a psychic guide that has shown it to me when I enter a trance…. First of all, I have to say that there is no way to plan for the most worst case scenarios, so you might as well throw them out. You could buy a 4×4 pickup, stockup on canned goods and shotguns, and have a fallout shelter; but really nobody knows for sure what tomorrow will bring. If somebody would have told me that this year we, personally, would feel a 3.8 earthquake I would have told them they’re full of shit. Yes, I said it. But we did feel a 3.8 earthquake in our house in Northern Illinois just last month. I’ve even heard some scientists say that the hurricanes were going to get worse and worse as the earth warms. Well, where are the friggin hurricanes? These kinds of things are not worth worrying about, believe me.

So be very careful with the information you choose to include in your research. Good and bad info exists both on the internet and off, make sure you check the sources that back them up and sniff them real good. If it smells like crap, it probably is.

Please review the following resources:

Fallacy – Critical Thinking Part 4

A fallacy is simply an error in logic. There are several kinds of logic errors that can result when people try to argue a point when the facts don’t exactly support the point. So a fallacy is not bad data but a bad conclusion.

The following types of fallacies come from the Wikipedia article referenced below:

  1. Fallacy of Accident – A generalization that disregards exceptions
  2. Converse Fallacy of Accident – Argues that a special case is the general rule
  3. Irrelevant Conclusion – Diverts attention from a fact
  4. Affirming the consequent – Saying that if A = B, B = A which may not always be true in logic.  For instance: A duck is a mammal, I am a mammal, therefor I am a duck.
  5. Denying the antecedent – It is like #4, only the inverse.  For instance, it is raining, therefor it is cloudy; it is not raining, therefor it is not cloudy.
  6. Begging the question – A conclusion on premises that assume the conclusion.
  7. Fallacy of False Cause or Non Sequitur – Incorrectly assuming one thing is the cause of another.
  8. Fallacy of Many Questions or Loaded Question – Groups more than one question in the form of a single question.
  9. Straw Man – Incorrect logic based on a misrepresentation of an opponent’s position

Please review the following resources for more information:

Popular books on fallacies by Amazon.com:

Self Deception – Critical Thinking Part 3

Self Deception is about believing that something is accurate when it is not.  I think it is a little more than that actually… being presented with valid evidence that your position is wrong and still refusing to give up that position. It is not unusual to deceive one’s self, we all do it.  It is important to recognize when we are doing it and be willing to face the facts.

Often you do hear all kinds of noise about this being right or that being right, and sometimes we just don’t know whether something is right or wrong, so we hold our position.  Instead of doing that, it is important to evaluate whether your position is right or wrong (if it can be proven) through independent research using good information.  Good information comes from credible sources, academic research, scientific inquiry, or primary research.  Only once we have stacked up enough evidence do we change our position, but we have to be willing to change in order to become better… whether it be a better business leader, a better spouse, or a better person in general.

Are you deceiving yourself in some way?  Make sure to review the information in the following links and decide for yourself:

The Value Of Critical Thinking – Part 2

We talked about critical thinking a couple of days ago and I have been pondering: how in the world can I communicate why critical thinking is valuable? I am sure you agree that thinking about stuff is important.  But what are you thinking?  Are you letting your upbringing, religious ideas, set attitudes, and incorrect facts cloud your judgment and affect your perception of reality?

Critical thinking is a set of skills, very specific skills, that help us figure out facts from beliefs and attitudes so that we can think clearer and come up with a better problem definition and solution to our problem.  Not that all of the solutions to problems will be ethical ones, and that is a separate consideration, but they will be more precise.

I was first exposed to critical thinking back in 2002 as I was attending college for my Bachelor’s Degree.  I noticed right away that it helped me cut through all the noise and pick up the important data as I was solving computer problems.  You think there are gremlins in your computer system?  I don’t… computers are logical and solving computer problems is much more straight forward than solving other kinds of problems.  The issue is finding enough good information to get to the root cause.

Working in a group setting, you often get information that is less than factual but if you ask good questions, you can often decide when you need to check facts and when you can believe them.  When you have enough real facts, often the answer is illuminated.

I have heard the argument that critical thinking is anti-religion and I did have my concerns.  However, critical thinking is about facts, data, and logic and religion is about belief and morals.  There is nothing wrong with taking factual data and brainstorming several solutions, then evaluating them for ethical issues.  So religion does have a place just not in the initial study.  Often people do have misconceptions about what their religion is and should probably do a study of their own… unfortunately most people are very passionate and refuse to believe that things are different than what they’re being told.  So don’t be that way!

So critical thinking is valuable for problem solving.  It is probably the most valuable thing I learned in college, because it was the basis for learning.  It helps add meaningful information to your information vocabulary that you can use in the future.  Make sure to review the following articles for more information:

What Is Critical Thinking?

Critical thinking is a thoughtful way of analyzing information through a variety of methods to determine the best course of action or to build a vocabulary of knowledge.  This is my own definition but there are many, many others because the idea of critical thinking is somewhat subjective.  Many people have a slightly different idea of what critical thinking is.

Mainly what we want to do with critical thinking is to figure out what is good information and what isn’t, then based upon that information give a theory of what reality is and go about trying to prove or disprove your version of reality.  We can also try to arrive at new theories based upon proven older theories.  So we try to eliminate the noise and hear clearly, perhaps for the first time.

We all have many assumptions that we believe are true based upon our cultural upbringing.  The problem is, many of our assumptions are beliefs and not facts.  If we use our beliefs and assumptions as valid data, we can fool ourselves into believing something is true when it is not.  We are not trying to disprove widely held beliefs, such as religious beliefs, we just have to understand that they may not be scientifically factual in nature where we can use them as the foundation for good decision making.  Many people, such as myself, will analyze the ethical nature of our decisions based partially upon religious beliefs, but determining what choices are valid is usually done in a more scientific manner.

Good Quality Information

Business of all types run on good quality information.  Information can be true, false, or subjective and sometimes you can actually prove when factual information is true or false, but often times you are looking for information that is true without being able to determine, for sure, whether it is true or false.  All you can do is make a judgement call about the quality of the information based on it’s source, how it was derived, and whether the assumptions it was based on are valid.  People, including scholars, disagree about the validity of certain data.  Often Republicans and Democrats disagree about the meaning of data.  CNN often has a more liberal interpretation of data than Fox News.  So data, and the meaning of data, is often subject to the interpretation of the interpreter.  Subjective information is just that, an interpretation of factual data.

When we go out and look for information, we are looking for the factual data and not the subjective interpretation of the data, because when we collect enough factual data it paints a picture of reality for us.  Our reality may be somewhat subjective in nature based upon what factual information goes into it, but we can test our realities by creating our own study.  My favorite study is a real life analysis of customer behaviors or a real life analysis of other data, based upon data collected within a computer system.  For instance, a website analysis tool can show where visitors to your website go, how often they are on your order page, what percentage order, how often they visit, and what searches placed them on your website.  This is useful so that a website can be modified to fit the visitor, the visitor can be collected differently to get the right kind of visitor, or the website routing can be changed to make it more useful to the visitor.

Information Technology (computer system) information can also tell many things about your customers buying habits, can help you order the right products at the right time, and can help you improve your operational efficiency.

Please review the following resources for more information about good information:

Why Are Business Ethics Important?

You are a small business person with 5 customers.  Why would business ethics be important to you?  Let me take you down the road of possibilities:

1. You can find yourself in a legal dilemma

What laws are relevant to you?  There are many and you need to be aware of them.  You can only market business opportunities in certain ways.  Certain products can only be marketed in certain ways (i.e. Dietary supplements cannot make medical claims).  You have legal obligations to your shareholders if you are incorporated.  You have legal obligations to your employees.  You may have legal obligations to the government or your community.

Note that the written law does not make something illegal.  We are under common law, which means that ultimately the courts can decide what is legal and what is not based on the constitution, written law, and past court decisions.  In addition, people can sue for legal damages if you break a contract, whether written or verbal, or if you cause them harm through neglect or intention.

2. You can find yourself in a moral dilemma

You are a (religion of your choice) and are subject to the moral absolutism that you place yourself under.  Moral absolutism means that you believe that killing is wrong no matter what the circumstance, or that lying is wrong regardless of the circumstance.  So the moral dilemma becomes, what if it is a choice between lying or killing?  Or lying or stealing?  Or stealing or killing?  Often people take on the responsibility of the consequences for their actions, and you must live with those consequences.

For instance, let’s say your company sells advertising, and allows advertising for cigarettes and alcohol.  Is your company responsible for lung cancer and drunk driving deaths?  Or let’s say you work for Bayer and Bayer sells asprin.  Is the company responsible for people that die from asprin overdose?  Companies had a hard time selling small airplanes at one time because people would crash, and then their families would sue the manufacturer.  I know for a fact that Cessna and other manufacturers go to great lengths to provide quality training, and the government goes to great lengths to ensure that airplanes are maintained, but crashes still happen.  Should small airplanes not be made?

A company may make a product that people die or are severely injured using.  Perhaps the company did not recognize, in the beginning of their company, that someday they would have a large enough customer base that 1 in 100,000 customers would use their product improperly and become permanently disabled because of it.  If these kinds of problems were considered at the very beginning, when the company was just starting out, maybe the odds could have been improved to 1 in 1 million or better.

3. You could find yourself in an ethical dilemma

Doing the right thing is the goal, but doing the right thing for whom?  A logging company wants to make their shareholders a good profit, but at the expense of the environment?  Could you imagine McDonalds selling Big Macs in India, where the cow is sacred?  What if you lost your biggest customer, would you lay people off or go bankrupt?  Being prepared in advance of these kinds of dilemmas is key – what is your company’s priority?

Small businesses are not exempt from tough ethical decisions.  You offer a 30 day money-back guarantee… do you give the customer back his money on day 31?  Do you allow product returns from a customer who never ordered from you?  Do you process a return for a customer who says they never received the product, even though you have his signature on delivery returned?  These are customer versus owner ethical decisions, and the policies need to be in place before a problem arises.  Then you may even need to allow more flexibility.  Are your customers generally honest?  How do you prevent fraud without creating an adversarial customer service environment?

You usually cannot think through every ethical quandry you are going to have before it happens.  It is usually a good idea to allow customer service people some flexibility and then consider the situation after it is resolved to see how it can be done better.  You may have to give a little away, but you can improve your processes as time goes on.

As for the larger ethical issues, you just need to consider over and over what the right thing to do is.  Consider all of your stakeholders and try to come up with the best solution for all parties.  Do the best you can and make a decision, however hard it is.  That is what business people do.  Just make sure to do it with a cool and level head.

Introduction To Business Ethics

In business ethics our goal is to do the right thing.  Period.  However, this isn’t always easy because sometimes we are faced with some extremely tough choices.  And we don’t just serve ourselves and our customers, we also serve our shareholders, employees, communities, and country.  Often different choices favor one group over another group.  Choosing the best choice for the situation is often labeled moral relativism because morals are typically absolute do this or do that with no exceptions.  Sometimes we do get stuck between morals and we cannot just walk away, we have to make a decision that we are going to have to live with.

As an example, we had heard that our dietary supplement may have caused serious health consequences and or death long before we stopped selling it.  Who did we hear this from?  Mainly we heard it from the media.  Based on the information we had at the time, we believed the news stories were directed at other dietary supplements that contained similar ingredients, and they were just referencing our product because it was the most popular dietary supplement at the time that contained the ingredients.  We had also questioned the MLM company president about it and we were assured that nobody was reporting health consequences from taking the product.  In addition, only one of our customers had reported health side-effects from taking the product and we sold a ton.  The one customer in question believe that the health problem was related to taking the product, but we knew based on the particular problem that it could not have been the product.  In fact, the product probably saved their life by bringing the problem front and center.

So we were pretty sure that our product was causing virtually zero health problems and it was helping tons of people lose weight.  Several people reported that it was helping them control their diabetes and lower their blood pressure.  One customer asked their doctor if it was ok to take and the doctor told them that it couldn’t hurt.  Overall, the information that we had is that the product was benefiting the public and not harming anybody.  We stayed on the safe side and advised our customers to take the product only as directed.

Many companies face ethical choices, especially in a tough economy.  Should we risk bankruptcy or lay people off?  Should we accept money from the government (or give people bad mortgages) or lose competitive advantage?  Should we sell this product when we know that some people will die from using it?  For the last question, consider automobiles.  Auto manufacturers know that some people will die because of automobile accidents, yet they still manufacture them.  Does it make sense to shut down the company because of automobile accidents?  Perhaps a better choice is to make the car safer and eliminate any safety defects.

It is very important to follow the law even when it is hard.  Still, management at large companies have found themselves in hard situations.  Should I report the correct numbers or save my shareholders from a huge loss?  Remember that some company shareholders are retirees and pension plans, not just rich people trying to get richer.  Still, in this case we are preventing future shareholders from a serious loss because we are disclosing correct numbers.

The goal of ethics in business is to do the right thing.  We must do the legal thing.  We are obligated to do the best thing we can for all of our stakeholders such as owners or shareholders, management, bond holders or lenders, our employees, the community, and our country.  It is not always easy but we gather all of the information we can and make the best decision possible.

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