Tuesday, January 20, 2009

France Denies the Law of Supply and Demand

Well, just when I was starting to like the French again, they go and try to void the law of supply and demand. More specifically, as reported in the Wall Street Journal, Luc Chatel, the junior industry minister, wants French automakers Renault and Peugeot Citroen to promise not close factories in return for a government bailout.

While I am all in favor of setting conditions for government money, those conditions shouldn't place the company in an uncompetitive situation. For if the company is uncompetitive, the taxpayer is chasing good money after bad. Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

Consider that labor, in general, is demanded by manufacturers. Labor is then segmented by its market and skill. Different countries have different quantities of skilled labor at different prices. We have all seen that with BMW plants in South Carolina and Hyundai plants in Alabama. Well, Turkey is much like Alabama, relative to skilled labor.

For the French automakers to survive, they need to find cheaper labor than 35 hour a week union members who take 6 weeks off and go on strike when the wine in the company cafeteria doesn't pair properly with the foie gras. Let's also not forget the smoke breaks.

However, M. Chatel thinks that by forcing the factories to stay open and carry excess capacity (15% for Renault per Credit Suisse), that will make things all better. WRONG! Let's consider the US plan which is to provide badly needed capital in return for a stake in the automotive companies. The governement is working to set benchmarks to streamline production, control costs, etc., though isn't calling for make work jobs, at least not yet. Come on, Obama was just inaugurated and the Congress hasn't finished all of the Inaugural ball debauchery. Compare Auto Insurance Quotes and Save!

In short, demand for cars in France is down with French labor being some of the most expensive in Europe. To stabilize their automotive industry, the automakers need to reduce costs, and lower cost labor may be the key. In the meantime, M. Chatel should go back and take a basic economics course and let that be his basis for recommendations, and not politics.

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Wednesday, January 14, 2009

What is a Commodity?

Commodity is a word that most everybody has heard but may not really know what it is or how it has any impact on their daily life. Below is a brief explanation and example of a commodity and why you should know what it means.

According to dictionary.com,:

. an article of trade or commerce, esp. a product as distinguished from a service.

Stock Exchange. any unprocessed or partially processed good, as grain, fruits, and vegetables, or precious metals.

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Talk about vague... Here is a easier explanation. We are remodeling our kitchen. My wife wanted the Grohe K4 faucet to replace our existing one. I looked it up and the MSRP was pretty high, so we asked our contractor to see what his best price was. Even then, it was pretty pricey, so I looked on Costco.com. Voila! They had the faucet and it was almost half of MSRP. I verified the part code to insure it was the right one, and purchased it.

The K4, whether sold by a retailer, supplier, or Costco is exactly the same. As a consumer, I spent a little time to find the best price, in other words, had full information, and made the decision where to buy it on price alone.

A product that is differentiated by price alone can be defined as a commodity. Another example of this would be of onions in the grocery store. An onion is an onion, regardless of where you buy it.

While it seems simple to think people comparison shop, many don't. With the availability of information via the internet, there is almost no excuse not to. However, a person may pay more for a commodity if the seller provides some service.

I traded taking the faucet home that day for waiting until it gets shipped. That onion that costs $.02 more a pound may come from the closest grocery store. People consume not just goods, but the conditions that surround the good (convenience, timeliness, returnability, utility, etc.). Many of these decisions are subconscious and provide little value. However, once one begins thinking about why they purchase things, one becomes a more efficient consumer. Click here to visit BloomingBulb.com

A commodity is a good that is differentiated by price alone. However, even though a good is a commodity, it doesn't mean that it is priced the same, as the seller may offer some service around the good. Why am I writing about this? I am writing about this so people can better understand and articulate why they make economic decisions, and further hoping they will make better decisions in the future.

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