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  Evolving the Principle of Price Fluctuation 2017-03-09 12:01:37  
  작성자: 최용식  (221.♡.102.211)조회 : 851      

Evolving the Principle of Price Fluctuation

Few people know that price fluctuations are caused by the interaction of supply and demand. Few people do not even realize that they can read price fluctuations by looking at both supply and demand. This is the price principle of the mainstream economics, and Choe’s economics faithfully accepts it. However, price fluctuations can not be read properly by looking at only the interaction of supply and demand. There are two other important variables that have significant impacts on price fluctuations. These will raise the price theory of current economics to the next level.

One of them is 'time shift of demand and supply'. In the case of certain goods, it is difficult to understand price fluctuations and it is difficult to adapt to price fluctuations without knowing the time shift of supply and demand. Another variable is 'quality'. The role of quality is important as it shakes essentially price fluctuations caused by demand and supply. Therefore, the variables of time shift and quality of demand and supply are key concepts that will evolve the principle of supply and demand in current economics. If the principles of supply and demand of economics evolve accordingly, it will make the price principle closer to real phenomena than ever. Let's look at the two in turn.

(1) Time Shift of Demand and Supply

The demand and supply of all goods move through time. If the price of a commodity is likely to rise, future demand for it moves to the present, and the current supply for it moves to the future. On the contrary, if the price is going to come down, the current demand moves to the future, and the future supply moves to the present. This is because economic entities can get more profits and less damage when they look forward the future. Particularly, the time shift of supply and demand is prominent in goods that have the attributes to proliferate money such as real estates and stocks. The mainstream economics ignores this point, so it is not possible to read accurately the price fluctuations of real estates and stocks. This is a important reason why the forecast of economists is even more often wrong.

Let's take a look at some friendly examples that are easy to understand. If the market of real estate is strong, what will happen? Anyone who should save a little more money to buy a house a few years later try to buy it even if they borrow bank loan excessively before the price of house goes up further. It is difficult for them to keep up with the price rise even if they save another two or three years. As the demand for the future shifts and it is combined with the present demand, the demand for the real estate greatly increases, and the price rises rapidly. The sooner the price rises, the more demand for the future moves to the present and cause ultimately even the speculative breeze. This is what we have experienced recently. As real estate speculation arose around 2005, some people were busy buying with a loan from a bank and raising the price up and up. If the speculative wind blows like this, the demand for other goods moves to the place. For an example, funds invested elsewhere will come into the housing market for speculative profit.

This price increase can not last forever because the future demand is also limited. So there will happen a hollowing out of demand one day due to its time shift, and then the price of real estate will stabilize. If the price remains stable, people wait until more money is collected. They do not feel the need to pay the loan interest. Then the price declines. At this time, even those who have the ability to buy a house immediately postpone the purchase. It is possible for them to make profit by investing money, such as depositing money with the slaughter money. Supply, on the other hand, is postponed if the price seems to rise. And if the price is likely to come down, the supply is hurried to lower the price. This is the conclusive evidence that demand and supply are time-shifting, and knowing this feature would lead to precisely reading of price fluctuation. So that you can make more profit.

The reason why the term ‘the market of real estate has a ceiling of one year and a floor of ten years’ was born is the time shift of demand and supply. If the demand shifts in time, then there is a hollowing out of demand, and then the market of real estate falls into a long-term recession. The history of real estate market in Korea showed clearly this point. We will look at the details at the end of this book, covering the 'Economic Diagnosis and Forecasting'.

In the stock market, the same phenomenon can be easily found as the market of real estate. It is more reasonable to see the stock market leading the real estate market. It is general that the stock market booms first the real estate market booms after, and when the stock market is turned off, the real estate market also enters a long period of recession. This phenomena are caused because the stock investment can be made with less save of money than the real estate investment. Of course, the opposition happens sometimes as in the United States of the 1920s. But the fact is that the stock market raises horrendously once as the real estate market and collapses at once when the bubble turns off.

As we have seen so far, it is very important that 'demand and supply shift in time path.' If you look closely at how demand and supply shift in time path, you can catch good opportunities making money more easily and more often. If you know this principle, you can prevent the damage from buying a real estate or stocks at the peak period of the market. Many people often suffer great losses because they do not know this principle. The ordinary person joins late when the speculative fever blows, and the result is mostly loss. For example, most individual investors had to suffer a large loss of property after the stock market boomed at the end of the 1970s and at the end of the 1980s in Korea.

In conclusion, it is necessary to revise and evolve the principle of supply and demand of the current economy. In other words, 'demand and supply shift in time path.' Through this way, you can read the price phenomenon more accurately and capture the inflection point of price while other people have not understood yet. Then you can earn big money. Whether it is stock, real estate, oil, grain, or gold it is not hard to make big bucks if you can predict the price fluctuation in advance.

However, it should be noted that the boom in the stock market will take long if the economic boom continues for a long time, and the stock market will be in a long sluggish period if the economic downturn continues for a long time. In fact, the former case took place in the United States, and the latter case took place in Japan. Even though the United States suffered three recessions since the mid 1980s but its depth was shallow and its period was relatively short leading to a long term economic boom till the financial crisis in 2008. So the Dow Jones which was below 1,000 in the early 1980s rose more than 15 times to reach more than 14,000 in early 2007. The ongoing boom in the economy had continued to create new demand filling up the time shift of demand. It is also true that the financial crisis happened in 2008 had a significant impact on the stock market. This issue will be discussed in detail at the 'Principles of International Trade' and 'Economic Pathology'.

On the other hand, Japan's Nikkei which hit nearly 40,000 at the end of 1980s suffered from a slump in the economy. The Nikkei which did not reach 2,000 in the mid 1960s surged from the mid 1980s as the economy picked up for a long period. The demand of stock shifted from the future to that time and soon the bubble burst eventually. The demand of stocks became vacancy and the Nikkei fell and fell below 20,000 when the economic downturn continues for a long time. In the mid 1990s the market recovered for a while when the economy showed an upward trend, but the Japanese stock market continued to weaken after the economy slumped. The Nikkei had fallen below 7,000 after the global financial crisis occurred in 2008. What is the cause of this unusual phenomenon? Whether stock or real estate, I buy them on the basis of my savings and my savings increase more when the economy is brisk. This issue will be discussed in detail at the ‘Principle of Price Decision’.

(2) Introducing Quality into Price Theory

There is one more thing that will evolve the theory of price fluctuation. That is, applying quality into price theory. Let's take a look at some examples that have actually happened in the Korean economy to make it easier to understand. Hwashin Department Store which was a pioneer of department store industry lowered the prices overall in order to win the competition with Myeongdong Department Store which turned up later and went well. But the result was reversed. Hwashin Department Store lost customers gradually and disappeared at last. After that, Myeongdong Department Store also took the train of Hwashin Department Store right after Midopa Department Store emerged. Myeongdong Department Store also lowered the prices overall and was deprived of customers by Midopa Department Store and eventually went bankrupt. Midopa Department Store was also the same. It chose the same sale strategy to check Shinsegae Department Store and the store closed at last.

Why did these incidents happen even though the mainstream economics teaches clearly that demand increases when prices are lowered? Why did this teaching is reversed in the department stores? The price theory of the mainstream economics is wrong. It overlooked one important variable that has a strong impact on price, rather than wrong. That is the quality. It is even more important than the quantity. In fact, customers looking for department stores consider the quality more important than the price. The failures of the above department stores were repeated because they did not know this fact.

Would there have been other causes such as a big management failure? Other causes are hard to see as decisive. The case of Shinsegae Department Store disproves it. When Lotte Department Store started to come into the limelight, Shinsegae Department Store raised the prices overall, and survive to enjoy prosperity so far. Lotte Department Store is located in the heart of traffic and has gorgeous facilities which seems overwhelmingly superior in all aspects to Shinsegae Department Store. Even though Shinsegae Department Store is located close to Namdaemun Markets which are famous to sell cheap products, its location is not so good for transport and the building is old, it has prospered so far. As Shinsegae Department Store raised the price when Lotte Department Store was opened, the customers believed that the quality of the goods sold by it got better. The mainstream economics overlooks quality that plays such an important role.

There are only quantities in the current price theory. In other words, the mainstream economics teaches that the quantities of supply and demand determine price fluctuation. Of course, in reality, the term 'non-price competitiveness' is often used, but it is far from the theory of price. The term is not supported by any theory. This means that the mainstream economics has a theoretical limit. Of course the role of quality is explained by the ‘shift of demand curve’ in the current economics but this is not the right way. In order for economics to play its role as a science, it must be able for it to explain how the shift of demand curve occurs in some cases, but the mainstream economics overlooks it. Would not the shift in the demand curve have a significant impact on price fluctuation to the extent that it is negligible? It is not. The term is very important, and the price theory should have embraced the role of quality.

As we have seen through the ups and downs of department stores, quality gives impact not only on price fluctuation but also on corporate well-being in reality. Of course quality does not have a significant impact on price fluctuation in some products, but quality affects price fluctuation much more than quantity in most products. Companies must keep this fact in mind. The same is true for ordinary people who choose to work. This is by no means a special case. This is a common phenomenon in the economy. Let's take a look at some of the more typical examples. So that other cases are much easier to understand.

Korea's exchange rate has fallen relatively long time since 2002 till 2007. The exchange rate, which had been at 1,326 won per dollar at the end of 2001, dropped to below 900 won at the end of October 2007. How should we look at the long-term depreciation of the exchange rate? Most of the economists at that time thought and comment that the outlook of Korean export were very dark because the exchange rate fell and the price competitiveness weakened considerably. The policy authorities believed so. But it is wrong. Korean export recorded a steady growth rate since the second half of 2002 when the depreciation of the exchange rate was revealed steady and the trend became evident. Why is the prospect of economists so wrong? Obviously, they did not know what quality would play in price fluctuation. This issue is very important for the future of the national economy.

At the end of October 2007, the Korean exchange rate was 899 won, down 32% from the end of 2001. The value of Korean money rose by as much as 47%. If so, the exporting company could not but raise the export price at least as much as above. In the meantime, raw material prices and wages had risen, so they had to raise their export prices by at least 50% with Korean money. If export prices were not increased by that much, exporting companies would have gone bankrupt because the profitability of export companies was 3~4%, at most 10%.

So as the price theory of the mainstream economics teaches, did Korean export decline? It did not. Although export price had risen sharply, Korean export had increased rather than stagnated. The rate of increase was much higher than the average level in recent years. As you can see in the table below, Korean export of US$ 150 billion in 2001 increased about 2.5 times to US$ 370 billion in 2007. The average annual growth rate was 17% per year. Why this strange thing happened, while the current price theory teaches that demand decreases as prices go up? There is no way for any economist to elucidate this phenomenon since the mainstream economics ignores the variable of quality.

Korean Exchange Rates(KRW/USD) & Exports(USD billions) 2001~2007

Division

2001

2002

2003

2004

2005

2006

07. 10

Exchange Rate

1,326

1,200

1,198

1,044

1,013

930

907

export

1,504

1,625

1,938

2,538

2,844

3,255

3,715

Source; Monthly Statistics & Research, June 2010, Bank of Korea

Until the 1980s, Korean exports were sold as bait goods at department stores and discount stores in the United States. They sold Korean products at $99 even if bought at $100, even though it would cause much of a loss including transportation costs and the other costs associated with imports. Korean products had done a good job of turning bait into high-profit products attached famous brands. At that time, of course, Korean export went well if the price was cheap. This history has established the stereotype of economists or economic experts that export increases when the exchange rate rises.

Recently, however, the status of Korean exports has changed. Electronics such as Samsung Electronics and LG Electronics won the competition by competing with the products of global companies such as Sony and Philips. The cars of Hyundai and Kia are sold at higher prices than some Japanese. Korean exports are on the rise as a luxury brand. Now that the price of exports has increased, it is recognized that the quality has improved, and it has changed to a situation that sells better. This is not a partial phenomenon that is specific to the electronics and automotive industries. Cosmetics, hang gliders, zippers, hiking boots, hats, helmets, nail clippers, and other Korean products produced by small companies also receiving luxury treatment in overseas markets. This is the overall phenomenon of Korea's export industry.

This has been countered by reality. In 2001, when the domestic economy fell rapidly, Korean government raised the exchange rate significantly. It was believed by the government that Korean export would increase greatly and the domestic economy would boom if the value of Korean money was lowered the export price would fall and then. But the belief of the Korean government was scorned by the reality as Korean export and the economy declined more rapidly. A similar phenomenon appeared in 2009 too. Despite the lower value of the won, Korean export had decreased. This issue is very important and will be looked into precisely as a representative failure of exchange rate policy in the 'International Trade and Exchange Principle'.

Let's look at another example. Korea has cut tariffs by signing an FTA with the EU, which could led to a price cut for European luxury goods. Nevertheless, European luxury companies have raised their consumer prices. As such, luxury companies of Europe have made a wise decision to ignore the price theory of the mainstream economics and their sales have been prosperous till now. Their business experience of long time would have played an important role in this decision.

Whether an export company or a domestic company in Korea is better to follow the example of European luxury companies. However, there remains something to be aware of. The fact is that the more expensive a luxury item is, the more clearly there is a resistance level rising in price. Luxury goods can raise appraisal of good quality by raising prices to the resistance level and increase sales and profits. However, demand may plummet in a moment when the price exceeds the resistance level that consumers are willing to pay. The resistance level of the consumer depends on the product, the era and the economy. Therefore, raising the price will require a careful and gradual pursuit of sales trend.


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