Supply & demand (and I’m going to use the ampersand, because these are two concepts that are typically presented as one–hey, at least I didn’t go with “supply ‘n’ demand”) is probably one of the first things someone who teaches economics will try to teach you. They will carefully explain the concept, and you will sit back in your chair, going, “This is crap! I can think of a thousand exceptions to this right off the top of my head!”
That’s because supply & demand is a fundamental concept in economic theory. Theory is lovely and wonderful, of course, but we don’t actually live in the world of theory.
Except when we do. Ooooooh.
OK, let’s go back to the beginning here: What is supply & demand?
Supply & demand has two halves: Supply and . . . (wait for it . . . wait for it . . . ) demand. Both of those things together are supposed to explain why stuff is priced the way it is.
What’s awesome about supply & demand is that it comes with pretty artwork! Here’s Wikipedia‘s version:
OK, it’s not that pretty. But look at the red lines marked “D1” and “D2.” The “D” stands for demand. (“Q” stands for quantity; “P” stands for price.)
What is demand? It’s how much people want something.
Here’s what you need to know about the demand curve: The cheaper something is, the more people want it.
The blue line marked “S” indicates supply. Here’s what you need to know about supply: The more expensive something is, the more people want to be the ones selling it.
Demand is usually not a hard one for people to grasp. Do you stock up on your favorite shampoo when it’s on sale? Congratulations, you are right there on the demand curve.
Supply can be trickier, because most people don’t think about selling stuff. But let’s say you had a job that you liked that was close to your house, and it paid you $15 an hour. What would you do if a very similar job, with very similar hours, became available in a very similar location–and it paid $20 an hour. $25? $30? $35?
You’d switch jobs–and the bigger that raise got, the more likely you would be to switch.
That’s you, a supplier of labor, finding your place on the supply curve.
Where supply meets demand is where the price is! There you go! It’s all explained! Simple as that! Blog post over!
But . . . what about those thousand exceptions? I learned about supply & demand curve in high school in the 1980s, and of course the first thing we said was, “What about Vaurnet sunglasses? People can’t get enough of those, and they cost an arm and a leg!”
So cool, man!
In the world of economic theory, goods are the same–sunglasses are sunglasses are sunglasses; in the real world, not to much. This is why, in the real world, branding matters so much–you need to convince people that your product is so super-special that it’s totally worth paying a premium for.
(Is there a really dull term economists use to describe that wonderful feeling that comes from buying a really fancy, sexy pair of sunglasses, because by God you’re worth it and people are going to swoon at your feet when they see how awesome you look!?! You betcha! It’s–get ready for some seriously sexy econo-speak here–called utility.)
The other thing to remember is that, in the real world, price is not simply measured in dollar terms. Is doing something a huge pain in the ass? Does it take a long time? Do you need to travel somewhere special to do it? All these things are included in people’s perception of the cost of getting something (and is why J-Pop doesn’t have the global audience K-Pop does).
From the supply point of view, the important thing to remember about the real world is that suppliers are focused on profit, not revenue. Think of you, supplying labor: If that job with that big raise is located so far away that the commute is absurdly expensive, then suddenly that higher hourly wage isn’t so appealing after all.
Because profit is what matters to suppliers, it can sometimes be difficult to understand why everyone’s pushing Product X instead of Product Y when, to the consumer, both products are priced the same or maybe Product X is cheaper.
But if the expenses of producing Product X are lower, then Product X is more profitable than Product Y, and all the suppliers will be running in that direction. (If you make Product X, then that can be a problem, because the competition will undercut you on price. So again branding is important, as is having areas of expertise that it’s hard for other people to replicate. These kinds of things are called barriers to entry, and suppliers want them so badly that they have to be carefully regulated to ensure that they don’t start hiring armed thugs to kill their competitors.)
Does all this real-life complexity mean that supply & demand are truly useless concepts?
Let’s take as an example: My chocolate consumption. Like many older people (shut up), when I buy chocolate, I cough up some serious money for a single bar of Fancy-Schmancy Chocolate–I don’t buy the three-pound bag of Cheapo Chocolates, even though the cost is the same.
Why not? Well, I have certain unique perceptions of utility. I don’t think Cheapo Chocolates taste as good as Fancy-Schmancy Chocolate, for one thing. Even so, I know that if I buy a three-pound bag of chocolate, I will probably eat it all that day–and then I’ll feel sick and get fat and not sleep very well. The manufacturers could cut the price of a bag of Cheapo Chocolates in half, and I still would not buy them, which seems to suggest that supply & demand is really just a bunch of hooey.
However, were the wholesale price of chocolate to double, I would probably eat less chocolate.
Why? Well, the makers of Fancy-Schmancy Chocolate know that I’ll pay, I dunno, $5 a bar, but am I really going to pay $10? Probably not. So they’re going to start selling a smaller bar for the same price, and hope that I don’t mind.
Some people will mind, though.
And it’s not just Fancy-Schmancy Chocolate who will be doing this–the amount of actual chocolate in anything chocolate that I buy will be less. There will be less chocolate in chocolate ice cream, less in chocolate cake, less in chocolate sauce . . . you see where this is going. There may even be new products introduced to get me to eat less chocolate!
Why? Because everyone knows how the demand curve operates–if chocolate products get too expensive, I just won’t buy them. I’ll start looking for substitute goods–which is bad if you sell goods containing chocolate, so you’d better get ahead of the game and start swapping in substitute goods yourself.
All right–so let’s start looking at supply & demand in K-Pop.
The big thing where you see supply & demand having an impact not just in K-Pop but in the global music industry (as well as many other industries) is the move to digital media.
Digital has come and conquered the music industry because it is much cheaper to consumers. And by “cheaper,” I don’t just mean it costs less, I also mean that it takes less work to buy digital music–click a few buttons and you’re done. (When I was young, we had to walk five miles through the snow to get to Tower Records! And the clerk was super-creepy and kept hitting on us!)
Now, there is no country in which the suppliers of music have been eager to get into digital–when you’re set up to sell things one way, it’s a big shock to have to completely revamp your business model and sell them another way. But digital has come anyway because the demand is so strong. The music industry has been left with two choices: Do you want people to pay for digital, or do you want them to pirate it?
Since the businesses that make up the music industry are suppliers, they sure as hell don’t want people to pirate. So the challenge for them has been to make money even without the larger revenues you get from selling CDs.
Of course, one of the things that helps (which industry associations tend not to advertise) is that digital music can be more profitable, even as it gives you lower revenues. The other thing is what we’re seeing now in Korea and the U.S.: The cheaper and easier digital is to buy, the more demand there is for it. And lots of demand = lots of money in the digital world, because the cost of replicating a song digitally is extremely low.
Now, I’m sure people are thinking of exceptions to this whole Digital Has Conquered All Thanks To Supply & Demand story. For example, many K-Pop groups rely on CD sales, and in Japan, Johnny & Associates won’t produce digital music at all!
But in all these cases, you are seeing the importance of branding. The good news if you’re in the music industry is that every song is different! As a result, while consumers will, say, switch music formats because one is significantly cheaper or more convenient than the other, they are actually not that likely to see one song or group as a straight-up substitute for another. That means that the suppliers of music do have some power. Indeed, if your brand is strong enough, you can create your own shortages if that is your business model!
The bad news here is that if you’re a performer in the K-Pop industry, certain labels want you to be regarded by consumers as interchangeable with other performers. These labels build brand for the label, not the artist. That way they can treat individual performers or even entire groups as substitute goods, swapping out these largely homogenized products without it much affecting demand. It won’t affect their supply of entertainers, either, because there’s always another trainee in the wings.
Are you getting a little uppity as a supplier of labor? See ya later, substitute good!