Use the "Law" to Save Thousands

by Gary Foreman

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It's a law that could save you thousands of dollars. Yet many people feel that they can't understand it. But the basic economic law of supply and demand is easy enough for anyone to understand.

Let's see how economics affects our daily lives. We'll begin with our jobs. Junior is about to head off to college and doesn't know which major to pick. Naturally he'll try to find something that he likes. But it's also important to learn a skill that will help him find employment after he graduates.

The first question he'll need to ask is whether there will be demand in five, ten and twenty years for the skills that he'll learn. For instance, personal computers have decreased the demand for secretaries and bookkeepers. More demand means a more secure future.

That doesn't mean that Junior should avoid every field that has a small need for people. It's possible that no one is entering a specific field. In that case he might do fine. The trick is to find a career where the demand for employees is greater than the number of trained people available.

The benefits of careful career selection will follow Junior for years. Take the time that he gets a puny raise. If his skills are in demand he can shop around for a new, higher paying employer. But, if there's little demand for his talents, Junior will be left without any real options.

Next, let's look at one of the best illustrations of supply and demand at work, namely auctions. Whether it's an old fashioned estate auction or one on the internet the same forces are at work. We all know the basic auction game. You put something up for sale and it goes to the highest bidder. The more bidders that are interested (more demand) the higher the price. If, on the other hand, two or more similar items are offered (more supply) then prices will be lower. Internet auctions are popular with sellers because they attract more buyers.

Last year's run up in gasoline prices is another learning experience. Crude oil prices had gradually decreased for years. OPEC controls much of the world's oil supplies. They decided to cut production. That set up a situation where demand for oil stayed the same but the supply decreased. The result? The highest crude oil prices in a decade.

But, there's a second lesson on supply and demand to learn from gas prices. It's something called 'elasticity'. Think of a rubber band. It stretches because it's elastic. Items where the price effects the amount of demand are considered to have 'elastic' demand.

Economists recognize that demand for some items will decrease if the price goes up. Take our gas example. When gas prices went up you decided to join a car pool. That's elasticity in action. But there are some errands that you can't avoid so your SUV is still on the road a certain minimum number of miles each week. That's in-elastic demand.

Meanwhile back to our friends at OPEC. They held oil prices artificially high while we cut back on our gas usage. But, generally people weren't trading their bigger vehicles for more fuel efficient ones. Yet. So before people got concerned enough to trade for a smaller car, OPEC decided to increase production a bit. That will increase supply and reduce prices. Their hope is that slightly lower prices will keep us from buying a fuel efficient car which would reduce demand for years to come.

So how do you use the law of supply and demand to your advantage? You look for mismatches that favor your side. If you're a buyer you want to be able to make your purchase when there are more sellers than buyers. Suppose you wanted to buy some winter clothes. You'll get a better buy shopping off season.

Or maybe you're looking for a new car. Fall is the time to shop. Once vacation season is over there are fewer people car shopping. That means less demand. Dealers have brand new models and last year's leftovers still on the lot. That's more supply. Who's more likely to come out ahead? The buyer should have an easier time.

Let's move to the seller's side for an example. Suppose you want to sell your three bedroom home. The most likely buyer will have children. They would prefer to move when the kids are between school years. So most of them shop in the summer. You guessed it! The demand for your home will be greatest in the summer and that's when you'll get the best price.

There's one final area of supply and demand for us to examine. That's the demand for money itself. Yes, there's a supply of money that's controlled by the Federal Reserve Board. And all of us, both consumers and businesses, create a demand for that money.

The 'price' of money is the cost to borrow it. The greater the demand for money the higher will be the interest rate. If there's not much demand for money you'll see lower interest rates.

So how do we fit into the equation? We have the ability to affect the demand for money. Let's suppose that you fall in love with a red convertible. The dealer is willing to finance it but at current interest rates the payments are too high. In effect you've just lowered the demand for money by the cost of that car. On the other hand, if you decided to buy it, you'd be increasing the demand for money.

Try another example. Your credit card balance keeps inching up each month. The bank has just increased the interest rate that they charge you. What's happened? They've figured out that your demand for money is increasing.

If you have available credit on another card, you can transfer your balance. That's possible because there's another supplier anxious for your business. But, if you can't find another source for the money, you'll be stuck with the higher rate (i.e. higher price).

If you keep your eyes open you'll find lots of areas where supply and demand effects your financial life. By paying attention you'll see opportunities to save or make money.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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