I'd like to do a presentation about basics of economics. More precisely; "natural"- and "market"- prices, and what influences both.

These terms are those used by Adam Smith in "The Wealth of Nations" from 1776. It was a great book to start with, lots of outdated, or plain wrong, information, but nonetheless, a great place to start.

I'll also explain the difference between "fixed"- and "circulating"- capital.

................................................................................................................................................................................................

The Natural price and the Market price

In short, what Adam Smith called the Natural Price, was the price necessary to covers the expense of producing said commodity. As if you own a factory that makes twinkies, you have to sell your twinkie at a price high enough for you to pay for the raw materials, for the wages of the laborers, for the rent of the land your factory stands upon, for the maintenance of tools and equipment necessary, and for the expense of your own living.

The Market Price is basically whatever people are willing to pay for your twinkie. By people, i mean people who are willing and able to pay at least the natural price. If you sell your twinkies beneath the natural price, you will have to cut your expenses. It's with the market price that supply and demand comes into play. If you're producing 100 twinkies, but there's only demand for 50, you will either have to sell your twinkies at a price lower than the natural price, or you'll have to sell your 50 twinkies at a price so high that they can cover the cost of not selling the other 50. The first scenario makes that you'll have to cut your expenses, the last means you'll have to increase the price so much you might even have fewer people who can afford your premium quality twinkies. So you're pretty much shit out of luck anyway if you overshoot the demand. On the other hand, if you produce 50 twinkies, and there's a demand for 100, buyers will be bidding against each other to get their hands on your precious twinkies. With your increased profit, you can invest in your factory so you can make more twinkies. When you produce more twinkies, the price will fall as you cover more and more of the demand.

In summary; when your supply exceeds demand, you will have to cut costs and produce less twinkies When the demand exceeds your supply, you increase your profits, and can invest in producing more twinkies. This way the supply adjusts to meet the demand, and thus, the natural price.

For this to work properly, competition is necessary. You might have a factory next door, also producing cookies. Those bastards are lowering the price of your twinkies in two ways. Firstly, they're increasing the supply, and thus more of the demand is covered. Secondly, you have to keep the price of your twinkies lower than theirs, so people will buy yours. Competition keeps you from selling your twinkies at absurd prices.

Seeing as you,dear reader, must be a frugal and industrious person, you have already seen a shitload of ways to increase your profits. You would benefit from: keeping the natural price as low as possible, paying workers next to nothing, buy cheaper raw materials, build your factory where the rent of the land is cheap, reduce costs of maintenance on tools and equipment. You could also manipulate the market so the market price goes up by; creating a monopoly, advertising, and planned obsolescence .

When you want to lower the wages, it's great to combine this with where you're going to put your factory. By putting your factory in the vicinity of loads of people who are available and poor, you'll make sure workers have to compete with each other for the jobs. The rent of the land is also likely to be low in low-income areas. It's also a great idea to make sure workers don't need much "qualifications" too work in your factory. As when the necessary qualifications increases, the workers available too you decreases, you might even end up competing with your bastard neighbor for competent workers. Buying cheaper raw materials? As the people producing the raw materials are following the same rules as you, and you can probably find someone, somewhere selling the same stuff at a lower price. Nowadays, globalization is awesome for this. As you're not confined too have too buy raw materials from your immediate vicinity, you might find some third-world country where you can get your ingredients for twinkies. It's not like you need the best ingredients either, just write that on the package and laugh loudly:)

Creating a monopoly might be the most effective tool for increasing your profits. You may have a lot more money in reserve than your bastard neighbor. Then you may sell your twinkies at a price so low, that he will go bankrupt, and you will have the entire market. You may also figure out that your neighbor isn't such a bastard after all. You're both just two poor capitalists trying to make a living in this world. You can make a cartel, and combine your efforts, then you would have the entire market, and share the profits. You may also do some massive advertising. Making people believe your twinkies are special may make them buy your twinkies, even if the bastard twinkies are cheaper. Planned obsolescence? That's a tricky one, it does require people to buy products more often, but if your twinkie "breaks" before the buyer eats it, they might not buy your twinkie again.

Fixed Capital and Circulating Capital

Fixed capital, is stuff like machines, tools, buildings, land and labor. Fixed capital in general has high practical value, and low exchange value. So you can't really expect to make much of a profit by buying fixed capital and then selling it again. Fixed capital is used to produce circulating capital, so you can sell it to others, and hopefully make your profit. Circulating capital consists of money and goods ready to be sold to industry, or commodities ready for purchase by a consumer.

Per example, you use the money (circulating) you've gotten from selling twinkies, to buy more ingredients (circulating) needed to produce the next batch of twinkies (circulating). You use your machines, tools, workers and factory (all fixed) to convert the ingredients into twinkies (circulating), ready to be sold to a consumer or a merchant.

You, as the lucky owner of a factory, make your living by producing a commodity. The merchant, on the other hand, makes his living by buying a commodity, and selling it at a higher price. The merchant needs a lot less fixed capital than you as a producer. Mainly, he needs some form of vehicle, to transport the twinkies he bought from you, and perhaps a warehouse for storage, and a shop where he can sell it to consumers.

Some other stuff regarding The Wealth of Nations

There are some more things i'd like to mention here as well. One thing is that the book that most of this is based on, is over two centuries old, so don't be very surprised if somethings have changed. Especially, when it comes to advertisement, it was made a remark in it. A. Smith used gold as an example on how something with little practical value could have an absurd high exchange value. Back then, gold wasn't very valued for it's good qualities when it comes to electronics or NASA stuff, it was highly valued because it was shiny. Considering how much money is used on advertisement today, it's hard to know if i'm choosing the brand product because it's better, and worth the higher price, than the cheaper products.

Another thing, is about perishable and non-perishable goods. A twinkie is of course perishable, but you might have to wait a loooong time for it to rot away. Perishable goods are very sensitive to fluctuations in supply and demand. As if you're sitting on a bunch of carrots, and everyone has had their share of carrots, you can't really store them, and wait for the price to go up. You have to sell those carrots now, or you'll just see them rot away. Some goods like computers and cars can also be seen as perishable, not because they will rot (or rust), but because newer cars and computer may make the old versions obsolete while you're storing your C64, waiting for markets to go up again. Non-perishable goods like a twinkie, gold or oil, can be stored, while you wait for market to go up again. This is also great if you want to make the supply to seem lower than what it actually is, so you can increase market prices. It would be a little like "oh dear, we don't have enough twinkies for everyone, we might just keep our huge storehouses locked a little bit so prices can rise".

Lastly, i'd like to remark that Adam Smith was part of what's called the Scottish enlightenment. He also wrote another famous book, "the theory of moral sentiments".

Sources:

"An Inquiry into the Nature and Causes of the Wealth of Nations" - Adam Smith, first published 1776

Available on wikisource.

"http://snl.no/Adam_Smith" - A page from a Norwegian web encyclopedia.