I understand that profits signals consumer satisfaction, but this is only ex post since profit or loss occurs after production. The price mechanism allows the producer to choose the most profitable means of production but doesn't say anything about what the consumer wants. The entrepeneur then, has the means to predict whether or not a venture might be profitable ONLY if there is an expected demand. For example, he could determine that selling 10,000 units at X price would yield Y profit. But how is he to know if there is an actual demand? Is it really just surveys, focus groups, and then place your bets, or, is there an economic law at work?
they said we would have an unfair fun advantage
"inevitably someone says something like 'If there is consumer demand then profit seeking businesses will provide it' they are incorrect. Am I just arguing sementics here?"
I don't think it's mere semantics, no. I think it's an important point. The above statement would not be incorrect, because the economy (in Libertopia or anywhere else) is dynamic. In other words, consumers communicate their effective demand by actually purchasing a given good or service at a given time, and the price of that good acts as a signal which reverberates throughout the economy and either attracts or repels not only that entrepreneur who was involved in the transaction, but others as well. If the original transaction yields a monetary profit for the seller, it will tend to cause him to increase the supply; not only him, though, but other "profit seeking businesses" will tend to supply that good/service as well.
So, while demand for any particular good/service is only known ex post, and the future is uncertain, past transactions act as a guide to help entrepreneurs predict how consumers might react.
Also important is the significance of prices themselves in coordinating action and the use of resources. Demand isn't just what people ask for, or what they desire. It's what they are willing and able to pay for. So, when in the wake of a natural disaster the price of gasoline is driven up, consumers have communicated and continue to communicate to producers information about their demand for gasoline - namely, that they are willing to buy more of it at any given price than they were before. But it isn't as if producers need to know the pyschology behind this change in demand. The fact that prices are being bid up, plus perhaps an understanding of market conditions, causes producers to supply more of the good.
Hope that helps.
There's no one way to do it. Each entrepreneur will be different, but ultimately, he does not know there is any actual demand. He may have a hunch, he may have worked in the industry for a while and so can make certain predictions only in that industry... maybe he reads goat entrails. The fact is, few people can do it well, and there is a lot of risk. That is the reason that the entrepreneur, when succesful, makes so much more than the worker. The worker gets paid as soon as he starts working, the entrepreneur must realize a profit first.
Every decent man is ashamed of the government he lives under - Mencken
I figured that was the case, but wasn't sure if I was missing anything.
Is it really just surveys, focus groups, and then place your bets, or, is there an economic law at work?
Partially it's because entrepreneurs predict what consumers might want. That's just educated guesswork, of course. More importantly, the market is an evolutionary process. Many ventures get started and those products the consumers want succeed. I would be interested if that's what you meant.
Some entrepreneurs have a certain instinct to see what people want, similar to when an inventor creates a world changing invention, it is obvious only after the results how good the idea/investment was but, before most will not be able to see it. Sometimes plain good luck is needed, for every successful business there are many more failures. It is all about taking risks and having the right gut feel, something that a central planning system with some kind of calculation models will not be able to do.
Most of it has been said already, but I would add that actual demand is only ever determined ex post. Sometimes, when you hear of entrepreneurship as a process of discovery, you might be tempted to think of it as entrepreneurs trying to discover consumer demand, and the consumers are simply waiting until the right entrepreneur comes along with the right answer. I think more often even the consumer himself doesn't know, until the time of the transaction, what his demand is.
Also, "superficial" things like advertising, packaging, hype etc. go along way in creating consumer demand. Thus, the discovery taking place in the market often means both parties discovering something.
That said, there is still value in collecting data and mapping trends, which can be helpful in forecasting what future demand might look like, but this is far from being an economic law. The proof of the pudding is in the eating, as they say.
Stephen Adkins:Most of it has been said already, but I would add that actual demand is only ever determined ex post. Sometimes, when you hear of entrepreneurship as a process of discovery, you might be tempted to think of it as entrepreneurs trying to discover consumer demand, and the consumers are simply waiting until the right entrepreneur comes along with the right answer. I think more often even the consumer himself doesn't know, until the time of the transaction, what his demand is.
This is what I was trying to figure out, I think. Demand can't exist in any meaningful way prior to supply. So when discussing how this or that would work in Libertopia and inevitably someone says something like "If there is consumer demand then profit seeking businesses will provide it" they are incorrect. Am I just arguing sementics here?
That's what market sector studies are there for.
These studies are really quite complicated and take into account a huge number of factors: average income, median age, sales trends of related products etc. If you buy a brand new car chances are in the following two years you'll be sent at least one questionary asking you a whole lot of things like how long do you think to keep your car, if your next car is more likely to be an SUV or a big sedan, if there are persons under 25 in the household etc. If you return that questionary it will go and contribute to a market sector study. The manufacturer who commissioned it will then read the study and conclude, say, that people over 50 want big sedans, people over 30 want SUV's, people making less than X dollars a year want subcompacts and so on. The studies will further highlight how many units the manufacturer can expect to sell and hence see if it's worth, say, design a new SUV or just stick with subcompacts. Mind that market sector studies, as sophisticated as they are, are far from infallible. For example studies commissioned in 2007-2008 led manufacturers to believe they needed to increase car manufacturing capacity to meet increased demand: people were confident and they expected they would change their cars more often and with more expensive models. Then what we all know happened and expansion plans were shelved indefinetely, new models put on hold or deleted altogether. New studies were commissioned to deal with the changing business environment.
Also the manufacturer may feel so big and powerful as to brush market sector studies as to try and impose on the market what they want. For example market studies commissioned by the motorcycle industry around 2002 highlighted the European market was radically changing: consumers were now interested in big road-oriented trail bikes instead of the various models they previosuly favored. Honda, previously the biggest seller of such machines, had other plans: they wanted to sell 600cc sportbikes and cheap touring machines instead because they have higher profit margins. BMW instead took the gamble and designed a family of new road-oriented trail bikes (at great finacial risk, but that's another story). The market studies were right: Honda took a beating and BMW made millions. Undaunted Honda kept brushing aside study after study which kept stressing the growing appetite for big road-oriented trail bikes and refused to look at sales charts: they wanted people to buy what gave them the best profits and refused to yield. Sadly Honda doesn't have a monopoly on motorcycle sales, hence people simply turned to other manufacturers which were ready to supply consumers with what they wanted.