Lecture 07丨The supply and demand of the final product determines the cost of raw materials

one called cost determinism and one called supply and demand determinism.

First, I will test you. Nowadays, in many cities, the government collects a lot of money by auctioning land at high prices. People say that the land auctioned by the government is so expensive, and the houses built in the end are of course expensive, so it is the government selling land at a high price that pushes up the house price. Do you think this argument is correct?

If you think this view is right, you need to listen to this lecture of mine.

1. Resources have a price because there is a demand for the final product

Let's go back to the "quarry story" in the 13th lecture, that story is quite important, there are a lot of truths in it, we have to dig deeper.

My friend bought a piece of land next to a quarry and put it aside in order to use it as a raw material for his stable quarry business and not to let others use it to build houses.

The reason this land has a price is because the end consumer is competing for this raw material. Those who go to see the museum, and those who buy the residential area, bid on both sides. With the competition, my friend thought that those who went to see the museum should be able to win, so he bought the land as a kind of raw material for the production of stone.

The land was priced because there was an ultimate demand for it, either from the people who went to see the museum or from the people who lived in the house. They are competing for the land to have a price. Do you see this cause-and-effect relationship? It's the demand for the end product that causes the land to have a price. Such a concept is incompatible with our traditional concept.

2. Cost determinism does not stand

The traditional concept is that a piece of land has a value, and this value is objective, we buy the land, then the value of the land will be passed on to the final product. The higher the value of the land, the more expensive the final product, this is our traditional concept.

What do we learn in accounting? According to accounting, the price of the final product is equal to the cost of raw materials, layer by layer, multiplied by a reasonable profit margin, which equals the selling price of the final product. This is called "cost determinism".

You have to think, if this principle we learned in accounting class is correct, then, how can entrepreneurs make money?

The final selling price of a product is equal to the sum of all costs, multiplied by a reasonable profit margin. No matter what the reasonable profit margin is, 3% can be, 5% can be, 1% can be, you fix this reasonable profit margin, the profit margin is fixed, the higher the cost, the higher the selling price of the product.

So how can entrepreneurs make money? What do they think about every day? They should be thinking about how to make the cost higher. The higher the cost, multiplied by that profit margin, the more money they can make. That's a ridiculous conclusion.

Let's say I have a used bike at BYU, and now I'm selling it for $100, how can I make more money? According to the accounting principle just mentioned, the cost of the bike should be increased. I have to put paint on it, one after another. This way this bike is united with the undifferentiated human labor, and the cost of this bike becomes very high, so it can be sold for a lot of money. Is that okay? Of course not. No one will recognize it in the market.

If the accounting principle just described is correct, then all the obsolete products in the world will not disappear: carriages will not disappear, candles will not disappear. Whatever it costs, if you multiply it by a supposedly reasonable profit margin, it will sell. That's not the world we live in now.

Cost determinism is wrong. More clearly: the logical relationship implied by cost determinism, that is, that the cost of the raw materials of a product determines the final selling price of the product, is wrong in this causal relationship.

3. supply and demand determine the price of a commodity, and the price of a commodity determines the cost of a resource

The logical relationship is just the opposite. It is not the raw material of the product that determines the final selling price of the product, but the supply and demand of the final product that determines the price of the final consumer product, and this price in turn, determines the price of the raw material above it layer after layer, ring after ring.

It's a relationship in reverse. The supply and demand of the final product determines the price of the final product, and this price in turn determines the cost of raw materials.

In fact, an entrepreneur, when he produces a product and puts it on the market, he will look at the supply and demand to determine the selling price of the product. He is able to sell as much as he can, as much as he can earn.

After making this money, then the money he earned - we call it profit or loss - to reverse the credit, or attribute it to the factors of production in each of the previous stages. From there, they put a price on these factors of production and determine their value.

If they make enough money to keep these factors of production and keep them in their production line, then they are able to continue to produce, and if they can't keep these resources, these resources will run away, and then their business plan will fail.

Therefore, there is no reasonable profit margin in the world, businessmen are able to earn as much as they can. After making it, he then takes the money he made and credits it to the previous factors of production. Likewise, there is no reasonable rate of loss in the world, to really lose up, there is nothing reasonable and unreasonable, that is, the blood is often happened.

There are very few people who can do this kind of reverse thinking.

Let's say we run to the lively and prosperous area of Beijing's CBD, eat a bowl of beef noodles in the restaurant inside, the price is quite high, you will ask the restaurant owner, why is this beef noodle so expensive? The owner will tell you that the reason why the beef noodles are so expensive is because the rent of the store I rented is itself more expensive.

You see, the raw materials are expensive, beef noodles are expensive. What he says is true, but he understands the cause and effect relationship backwards.

The correct cause-and-effect relationship is that the CBD is a place of high productivity, people want to stay here, stay here to make more money, so people have to compete for this piece of land, thus making all the raw materials here become more expensive. Everyone is willing to stay here and also to dine in this place. It is the more expensive dining here that causes the store rent for dining here to be more expensive. The cause and effect relationship is just the opposite.

There used to be an economist who said that when Shenzhen started its reform and opening up, box lunches were very expensive, so Shenzhen people had to pay extra high wages. Is his statement right? Wrong, the opposite is true. It should be the place of Shenzhen is particularly productive, willing to run to Shenzhen is particularly large, so push up the cost of a variety of resources in Shenzhen.

Let me give you another example. In the United States there are three kinds of colleges, their graduates are particularly high wages: medical school, law school and business school. Some people say, because the medical school, law school, business school professor salary is particularly high, so their students pay a particularly high tuition, so they have to graduate from a particularly high salary.

Is that correct? Actually, it's just the other way around. It is the graduates of medical schools, law schools, and business schools who are paid extraordinarily high salaries, so that the raw materials used to produce them, i.e., the professors, are paid extraordinarily high salaries. The cause and effect relationship is reversed. Of course, the particularly high salaries of professors in these colleges also attract better people to teach in these colleges.

Take another example, and you will understand it completely. Some people say that Faye Wong is particularly well paid for her concerts, so her concert tickets are particularly expensive. Is it right to say that when Faye Wong wants more, her tickets are sold more expensive? Not true. It's because more people like Faye Wong, more people are competing for Faye Wong tickets, and they are willing to pay a higher price, which makes Faye Wong's labor resources more expensive. The cause and effect relationship is just the other way around.

After you think clearly about these examples, let's look at the questions raised at the beginning of this lecture, and you will know the answers.

4. government land auctions do not push up housing prices

Will the government sell land at a high price to push up housing prices? The reason why the government can sell land at a high price is not because the government wants to sell land at a high price, it can sell land at a high price. The reason why the government sells land at a high price is because there is a demand for the land from the end demanders and the price of the land will go up.

It is the demand for the final product, that is, the demand for housing, that causes the price of housing to be more expensive, and more expensive housing causes the price of land to be more expensive. The causal relationship between raw materials and the price of the final product is reversed.

Think about it, as long as the final number of houses does not change, even if the government gives out the land for free, will the final price of the house change?

Let's say that if there is only one house on the market, who owns that house? There are a hundred people in line, and the first person offers $1 million, and the second person offers $990,000 ...... If there is only one suite on the market, that suite goes to the person who is willing to offer $1 million. So, whether the government gives out land for free or auctions it off at a high price, it has no effect on the final price of housing.

So what difference does it make when the government gives out land for free and auctions it off? The only difference is whether the government's revenue is explicit or implicit money.

If the government takes the land to auction, then the government receives the land use money, which is the explicit money, and this money can enter the treasury; if the government assigns the land to developers for free, the first developer who gets the free land, earns the free gift, and the developers behind will follow up and get the land sent by the government for free through various methods, including the black box operation method.

The end result is that the land grants that the government would have received explicitly can only be distributed secretly between officials and property developers. This is the only difference.