Internet Economics 101

Posted on 06. Feb, 2011 by mike in Economics

Dictionary.com defines economics as “the science that deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind.” When in put in these terms, it’s only natural to feel a bit intimidated, (much like the way I feel whenever I attempt to read Atlas Shrugged, which is an enormous book I haven’t committed myself to reading yet) but the basics of economics are very simple, in fact you probably know most of this already. Here is my attempt to teach economics by relating it to the internet.

Back when the internet was new, online selling sites were used exclusively for old and unwanted things that needed a place to go. However, over the years sites like eBay have evolved into a more complex network, full of opportunities.  If you were to go onto eBay during the holiday season, you would find a ton of brand new items up for sale priced higher than retail.  So how do these sellers do it?  Are the people bidding on the items crazy?  No these sellers know how to use economics to their advantage.

Same old economics, new ways to utilize

The cool thing about economics, unlike other business subjects like marketing and entrepreneurship is that the basic rules haven’t changed with the invention of the internet.  Supply and demand still works the same way, and economists can still predict our economy’s next move.  This can’t be said for marketing which has completely changed with the invention of the internet.  I don’t think they taught google adwords in the 1970s.  Anyone with a pre-internet economic background can transition to internet selling with ease.

Supply and demand

Supply and demand are the building blocks of economics.  Supply is the amount of goods willing to be sold, and demand is the amount of goods willing to be bought.  As price increases, demand will usually decrease.  Think about it, if you’re going to buy an iPod touch for $230, but when you are ready to buy the price increases to $300, you will probably reconsider buying it.  This is the same way most consumers think, which is why demand decreases when price increases.

How prices change

Now let’s forget about your iPod increasing in price and say it is still $230 (just to make this easier).  Let’s say 30,000 people are willing to buy this iPod today, I’d say this is a high demand.  If there are 10,000 iPods willing to be sold, there is a low supply and not all 30,000 people will be able to get an iPod.  What sellers will do is increase the price to let’s say $300 because as mentioned above when price increases demand decreases.  Now that demand has decreased there are less buyers, maybe only 15,000, meaning only 5,000 won’t be able to buy an iPod.  The rest will all pay $300 for an iPod.  Sellers benefit from economics because if they had just kept prices where they were and let the consumers duke it out at the store, they would have only made $2,300,000 (230*10,000).  By using economics to their advantage they will make  $700,000 more and prevent the mass chaos notorious with high demand products.

Great but I can’t set prices like stores can

Sure you can, on eBay you can set prices to what ever you wish.  Realistically however, setting your own price on eBay isn’t going to work as well as it does for large retailers.  If your prices are too high, buyers will simply buy from the listing right below yours. What you should do is use your knowledge of economics to predict the next big item.  Knowing the next hot item is huge.  eBayers who can predict what items are going to be hot make boat loads of money especially around Christmas.

I recommend that everyone who is struggling with these economic concepts attempts to sell one thing on eBay. Just one thing and I can guarantee you will understand these economic concepts. Researching and selling on eBay will be a great learning experience. I am recommending this as a tool for learning and not a method of getting rich. Just to make myself clear I don’t know much about eBay and I can’t help you make money on it, what I do know is that it relies on the concepts I have described to you.

Tags: demand, eBay, economics, hot items, selling, supply