The Wise Investor
profits when they sold their strawberries at the local market.
The following year, strawberries were just as popular.
Most of the people had eaten strawberries by now, and
although they were expensive, they were delicious and
worth the price.
All the farmers noticed this, and the following year
several more farmers planted strawberries on their land.
Again the strawberries sold well, but the price was slightly
lower, as there was a greater supply of strawberries and the
farmers had to lower their prices and compete with each
other in order to attract customers. The following year, even
more farmers planted strawberries. A large number of
strawberries were sold, but there were so many produced
that year that no farmer sold his entire production.
It was quite expensive to grow the strawberries, as they
needed careful attention. The farmers were not able to
charge enough to cover the cost of growing the
strawberries, and few made a profit that year. The next
year, many farmers abandoned the planting of strawberries.
This story, Kate, illustrates how the supply of goods
changes over time to reflect the natural demand.
If the desirability of an item is greater than the available
supply, prices will be high and more people will start to
produce the product.
As production increases, the prices will drop. Eventually,
the price will reach a point where the profit on selling them
is small, and no more people will produce the product. In
short, Kate, there are four things that determine the price of
goods in a market.
In the short term, the price is determined by the demand
for the goods and the supply of the goods.
In the longer term, the price will adjust itself to reflect the
natural desirability of the product, and the difficulty and cost
in producing it."
John paused for a breath. He felt he had illustrated the
basic operation of markets, how prices were determined by
supply and demand.