Joe Barbieri
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Is Economic Supply and Demand Being Replaced by Dependencies?

The basic notion of economics is that a group of people decide they want something that has not been made before. This want is called demand. Someone understands this want and decides to build something that provides a solution. That someone is the entrepreneur and the something is called supply. The demand group and the supply group get together and agree on a price to exchange the solution. This is called price discovery in a market. In the beginning, there were no other influences in setting how much of the solution was made or how the prices were set. This is called the free market. Notice that the customer created the demand and the entrepreneurs or suppliers met their need to create the market. The customer has a choice as to whether this product will continue to be purchased. Should it be the reverse and the supplier builds something before the demand exists, the customer had the choice to refuse it. This would create a change in the economy through bankruptcy or other changes in the market participants.

What is a dependency? Another word for dependency is an addiction or a captive market. In this case, the customer is not buying because of want or choice but out of lack of choice and lack of alternatives. A monopoly, oligopoly or cartel of any kind used to be illegal and frowned upon because these groups were known to warp a market by creating false scarcity and skewed pricing. A group of businesses that are not a formal cartel but engage in anti-competitive behaviour will do the same thing as a monopoly or an oligopoly. If you are buying something, you are following the terms of the seller and there are no other options. You can choose not to deal with the monopoly, but in some cases this is not possible. Present day “cartel like” structures include OPEC, the diamond cartel, currency issuance by government, privatized utilities, toll roads and petroleum companies. There are options in all of these cases, but they are either made illegal, the competitors are bought out, or replicating the service is cost prohibitive.

There is an economic argument made that in some cases, the monopoly is the only choice because having one provider is the most efficient solution. Should this happen, the monopoly should be regulated or have its profits limited due to its ability to skew markets. The regulation should be designed to keep the markets fair rather than create a hinderance for market activity. This was the case in the past, but is it true today? As an example, if you have a private hydro system, and prices are not regulated or accountability enforced by someone objective, what options are there? If a consumer tries to provide their own energy, they may encounter issues with distribution or selling it. These hurdles prevent the free market from doing its job. The customer becomes a dependent to the product or service provided, which is now a captive market. Both the free an captive markets exist today, and knowing the difference is key to getting the facts about what is happening in the economy.