Saturday, 15 August 2015

Economic Equations of a Fair Market Place

Problem Statement: Coconut prices dipped sharply sometime last month owing, perhaps to over supply or lack of demand. Farmers suffered because they could not recover the costs. 

Understanding, Analysing and Solving the Problem: 

  1. The proceeds from coconut sales were supposed to be sufficient to meet the livelihood expenses of the farmer in addition to covering the direct and indirect costs of growing the coconuts. At this stage, let us assume that the price paid for growing the coconuts (labour, etc) are fair. 
  2. Let us focus on two assumptions of the problem. First, that the buyer is unwilling to pay a price higher than the one determined by the market. Second, that the seller has an understanding of what is fair price.
  3. Let us begin with the second assumption. Is the seller equipped to determine the fair price, without reference to the previous market price? If we assume that there is a buyer who is willing to pay a price, which is fair, will he be able to calculate the fair price? Will he agree that any price above this price is unfair to the buyer? Will the buyer trust him and agree with his calculation? 
  4. If the dialogue is between the seller and the buyer, without any intermediary, it seems very much possible that all the above questions get a 'yes' in response.
  5. Thus the two parties can arrive at a Market Price, which is acceptable as fair to both parties. 
  6. Now, let us get the aspect of demand and supply. The seller has arrived at the unit price of coconut assuming that all his stock will be sold. But if the supply is more than demand, the seller is unable to meet his total sale proceeds requirement. He then needs to innovate to add value and sell the value added product or sell it to someone who can add value or preserve it. This transaction also has to happen at the same fair price. Is that difficult? If no, great. In most commodities, it should not be difficult. Some amount of processing or preservation is possible. But if it is indeed not possible to add value or preserve, both the buyer and the seller should bear the brunt and reduce the production of coconut next year and replace it with something else.
  7. If the demand is more, the buyer has to find an alternative to coconut (or consume less) and urge the seller to increase production next year by replacing something else with coconut. 
Appears to simplistic, isn't it? I agree it does appear simplistic. But that is not the point. The point to be noted is that if there is sufficient trust between the buyer and the seller and both are committed to being fair, a solution is possible. Even a complex problem can be solved. It may take more time or intelligence, but it is possible to arrive at a fair price. 

If you think you are a fair buyer and a fair seller, let me know. Let us see if we have sufficient number of people to create a fair marketplace! 

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