53. Where Do Prices Come From?

Ever wonder why a candy bar costs a $1? Or why a pizza costs nearly $20? On today’s episode Brittany and Connor dive into prices and where they come from. Spoiler alert, we might have more power over this as consumers than you might think!

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Here is the transcript of our conversation:

 

Brittany: Hi Connor.

Connor: Hi, Brittany.

Brittany: So I just went to the store today and I was in the proto style picking out my vegetables, and I noticed that Red Bell Peppers cost more than Green Bell peppers. And this seemed pretty weird to me because they’re both pretty much the same thing. So this got me thinking, where do prices come from, and do the buyers make the prices, or do the sellers decide? So what do you think, Connor? Where do prices come from?

Connor: Well, I agree that green peppers and red peppers both are very similar because they’re both gross. You’re like vegetables. Why would you voluntarily buy vegetables at the grocery? No, I’m just kidding. My wife is probably listening. My mom as well. I love my vegetables. So yeah, when you go to the store, that’s super interesting. You see the prices all the time. And sometimes as a kid, I remember thinking, that’s just what it is, right? It’s just this kind of magical number someone somehow came up with, and only later in life did I realize that prices are packed full of information. And what I mean by that is there’s a lot of things that go into figuring out what the price is gonna be. Let’s use the Total Twins books as an example. A single book is $9 and 99 cents. And if you wanna buy that book, that’s the amount you have to pay.

But why did I set the price to be that amount? Well, I have to pay a lot of people in order to make that book, and I have to figure out how to pay all those people and still be able to make a little bit of money so that we can continue to print more books to make them available to more people. So I have to do all kinds of math. I have to talk to all kinds of different people. For example, I’ll talk to my printer and I’ll say, Hey, if I order 5,000 books at a time if we print 5,000 books at a time, what will you charge me for each book? And he might say, $2 and 50 cents. Oh, okay. Alright. So then I have to figure out the math there. But then if I say, Hey, if I print 10,000 at a time, then what will the price be?

And he might say, Well, I can drop it down from $2 and 50 cents to $2 and 20 cents. So all of a sudden I’m able to save 30 cents per price of the book if I can pay for doing 10,000 at a time rather than 5,000 at a time. So the more that I can do, the better I can lower the price. Because when you buy things in bulk, the price is cheaper. Why is that? Well, because if I go to the printer and I say, Hey, I only want to print a hundred copies of the book, what happens when that happens? Well, the printer, they have their employees and they have to get the ink ready and they have to lay out all the paperwork and the little, what do they call ’em? The little templates where the ink is gonna go in. They have to set up the machine, they have to clean the machine.

And so there’s a cost, right? They’re having to pay all those employees for their time to do all that. And let’s say that costs $500 in terms of the time of all those employees to set up the machine. Well, if Connor’s only printing a hundred books, it’s not worth it to the printer to do all that just for a hundred books. So they’re gonna say, Well, Connor, we can do a hundred books, but it’s gonna cost you $150 per book because we have to raise our prices in order to get enough money to pay our employees for the time it spends. However, when I want to print 5,000 books, then it still requires the same amount of time for the printer to pay their employees to set up the machine, except now they can spread that cost, that $500 across a whole bunch of books so that it’s only a few pennies per book rather than a ton.

And so when you order a lot, if you buy a bunch of green peppers, if you went to the grocery store and you’re like, Hey, I wanna buy five cartons worth of, red peppers or green peppers, they’d probably give you a deal because it would be worth it to them rather than selling one at a time or two at a time. They could sell a bunch. And so prices have information of all, if you remember, in The Tuttle Twins in the Miraculous Pencil. And if you don’t have that book yet, you can go to tuttletwins.com/products to see that book in the other books. In that book, we talked about how all these products are made. We talked about the pencil and how it has this little pedigree chart of all the different things that go into the pencil.

And so prices work that way as well in figuring out what a pencil is gonna cost. They have to figure out that the pencil kind of manufacturer company, they have to figure out, well, how much is it gonna cost us to buy the wood and to have it shipped to where we are? And what about the hummus and what about the metal? And the little for rules, they have to figure out how much other people are charging them and then how much those people are charging them. And at every step, because everyone’s being paid along the way, they have to factor in those prices before they figure out what the final price is gonna be for the pencil. And so everyone’s charging a little bit of money, a little bit of think if you’re a farmer, let’s say, you’re wanting to, let’s use the green peppers as an example.

At some point, there’s a farmer who’s kind of producing that pepper and they have to figure out how much they need to charge to sell it to maybe the, There’s like a company in the middle that kind of processes and cleans them and then ships them to grocery stores. And so the farmers like, Hey, in order to make it worth it for me to plant and grow green peppers, I need to charge you. I mean, I have no idea here. Let’s say 25, 25 cents. I haven’t been to the store in a while to know what the prices are. Let’s say it’s 25 cents. So the farmer’s like, Hey, I need to sell ’em for 25 cents to make it worth my while in order to pay for my bills, my home, my food so that I can focus just on growing green peppers.

So then the company who buys the green peppers from the farmer, and they, let’s say they wash ’em and put ’em in bags and then send ’em to the grocery store, they then say, Okay, well if we buy 500 peppers a day, then we can sell ’em for this much. But if we buy 5,000, if we have a bunch of grocery stores buying them, we can lower our prices because we’re selling way more. And so rather than us needing to make a bunch of money off of just a few peppers, if we make a little bit of money off of a lot of peppers, we can lower the price but still make a lot of money because we’re selling a lot of peppers. And so that company has to figure out, all right, well 25 cents that we’re buying them from the farmer, but then we have to pay people to wash ’em and bag ’em.

We have to pay for the bags, We have to pay for the trucks and our warehouse, da da da da, da da. So they’ll do the math and say, Well, in order to make it worth our while, we need to sell those peppers for 40 cents to the grocery store. And then, of course, the grocery store has to make money for all of their workers and their people. And so then they might sell it to you for 50 cents. And so everyone’s kind of getting a little bit along the way. So when you go to the grocery store and you see that green peppers are 50 cents, that price has a lot of information about that whole pedigree chart of all the people who have had to make a little bit of money along the way. So that’s why I think the pricing is kind of cool. But we’ve talked in the past, Brittany, let me get your input here. Prices change over time. The prices don’t just stay the same. Bell peppers have not always been under my silly example, 50 cents of the grocery store. And so why is it that prices like so kids today when they read, for example, The Tuttle Twins and the Creature from Jekyll Island, we talk about how prices, movie tickets, Grandpa tunnels, complaining movie tickets were so much cheaper in my day. Why do prices change over time?

Brittany: So we’ve talked about the Federal Reserve before and we’ve talked about inflation. In fact, we have a whole episode on inflation. So highly recommend you list that way if you haven’t yet. So when the Federal Reserve is pumping or printing all this money, and I think you mentioned this, this is important to mention, that they don’t necessarily print it anymore. It’s you can just press a button now. But as they’re printing all this money, more money goes into the economy, and that doesn’t mean as much, right? It’s not worth as much. So that causes prices to go up because what $5 could buy you yesterday? Now that the Federal Reserve has printed more money, $5 won’t buy you the same amount now. Now you need, let’s say $7 to buy what you needed $5 for yesterday. So when you have all this government intervention, it’s almost as if the government is trying to hijack this process.

They think that they can set prices by manipulating the economy. But there’s another factor about prices that I thought we could discuss. And that is the consumer. Because the consumer also has the right to look at the way or the price someone a vendor is charging and says, I don’t wanna pay that. And that’s kinda an important part of pricing too because they’re not gonna sell something that a consumer isn’t gonna buy. If somebody is selling a pencil and it’s just a regular, very cool, miraculous pencil for $500, are you gonna buy a $500 pencil, Connor?

Connor: No way. And it brings up an experience. My son Keaton had just a few days ago, he’s into Pokemon, and there was, I guess a store where this woman was selling some used Pokemon cards, and she had a price that she calculated and felt that that was the right price to charge for whatever her reasons were. And so my son disagreed. And so he was talking with my wife and me about how to handle it cuz he’s like, Well, if I buy it new, then it costs this much. But she’s selling it used, but she’s charging almost the same amount as if it was new. And so we talked to my son about negotiating to haggle, right? Haggling is kind of when you’re talking prices with someone and you’re like, Well, I don’t wanna pay that much. I’ll pay a little bit less

Brittany: Like Buy a car. I think people kind of associate that when you buy a car, there’s a sticker price, but you can negotiate what you pay

Connor: Absolutely. And that gets to your point that consumers, the customers like us have some power because prices are, not only do they change over time, like you just said, they’re also, I guess flexible is a good word for it because it’s just what someone is requesting. But that doesn’t mean you have to do it. So my son went to this woman, and he explained his reasons why he felt like her price was unfair or not the right price. And he asked, Hey, would you take this? And we talked to him about how you always go low and then the other person gives a counter-proposal that’s somewhere in the middle, which is where you wanted them to be. Anyways, it’s kind of a little game I guess, that a lot of people play. And it worked because she’s like, Oh, okay, well I can’t go that low, but would you do it for this?

And they agreed and then sold and bought that item. But it brings up another point, Not only Brittany, as you point out, do the customers have the power when it comes to pricing, part of a related reason why they do is that pricing or value is subjective. And what that means is, let’s use the opposite word objective. If pricing was objective, then let’s say there’s a rare Pokemon card to keep using my son’s example. If pricing was objective, then we could look at that card and say, For X, Y, and Z reasons, we know objectively that the price of this is $100. And no one could dispute that because it is objective. It is kind of clear-cut. There are facts involved, and anyone who looks at those facts would see that they would support the idea that that card is worth $100. But that’s not how pricing works.

Pricing is not objective. Where anyone can kind of see that pricing is subjective, meaning that everyone has different opinions and different values. So if you go to an auction house or a, I guess they’re called auction houses, but if you go to an auction and they have this rare painting or even a rare, let’s be silly, they have a rare Pokemon card. Let’s say that this was only printed five times in the whole world, and so you’re at this auction for a Pokemon card. Well, some people might look at that and think it’s no more valuable than the cardboard and ink that was used to make it because they don’t like Pokemon, they’re not interested in it, or They don’t know anyone who is. And so it’s just a card. And so, hey, to me that’s worth like 50 cents. Whereas other people, like my son who is passionate about Pokemon, who value Pokemon, and who know the intricacies of Pokemon, know that that is a scarce resource.

Scarce means it’s very rare and they really want it because they know there are so few of them. And maybe that card is in demand by Pokemon players. In other words, a lot of Pokemon players would love to have that card. So because of that, the price goes up because there’s a lot of demand for it. A lot of people want it, but it’s scarce. There’s not like pencils. We talk about it in

The Miraculous pencil book. Pencils are super cheap just cuz they’re everywhere. They’re easy to produce at the end of the day. And they’re not rare, but a rare Pokemon card, it’s the price would go up. But someone who disagrees with that, someone who doesn’t like Pokemon, for them, that price would be absurd. Let’s say it’s sold for a million dollars, They would be like, Are you kidding me? That’s just a card.

But that’s because pricing is subjective. Someone might say, Oh, it was totally worth it, a million dollars, that was a steal. It’s totally worth that amount. Whereas a lot of people think that’s crazy. So that means pricing or value is subjective because everyone has different values and different preferences. You might like certain things over others, and so you might totally be okay spending $50 on this toy, whereas other people would think that’s totally crazy. But to you, because it’s subjective to your interest. That’s why pricing could be so different all the time because it’s up to people’s own preferences.

Brittany: And you bring up a good point, and this is a little bit controversial, A lot of people don’t agree on this one, but there’s something called price gouging. So let’s say you are in a city that has been just demolished by a hurricane and vendors can’t get to you. It’s very dangerous for vendors, store owners, let’s say, to get to you. But you need bottled water. Let’s just say bottled water is a thing you need. Well, it’s gonna be really dangerous for the people who have bottled water to get to you because people in your town will have already cleared it out. If there’s an emergency, We saw this with toilet paper during the pandemic. People go, they take everything off the shelves and there’s nothing but people still need toilet paper, they still need water. So sometimes vendors from out of state will pay money to come into these local areas after a disaster and they’ll sell water bottles or they’ll sell toilet paper, but they will jack up the price.

And a lot of people get really upset about this. They say, How dare you? This is an emergency. You shouldn’t make somebody pay for that. But there’s a problem with that. First of all, people are still willing to pay for it because they need it. But there’s also something that people don’t consider is that these vendors who are coming out from out of town, they’re risking a lot. First of all, hurricanes are dangerous. So they’re coming into a scary area. They’re also paying for travel. They also paid for those supplies. And so a lot of times people get angry saying, How dare you charge more for this product during an emergency? But we actually should be really grateful that we’re paying more because at least we have access to that.

Connor: Very, very controversial for sure. A lot of people have strong opinions, but yeah, because pricing is really just an agreement between the buyer and the seller, then they should be able to do it however much they want. No one is forcing them to buy something. And so pricing is really, yeah, as things are like with the Pokemon card as things are scarce, if there’s not a lot of toilet paper, right, and toilet paper’s hard to find, then, of course, the price of toilet paper is gonna go up. If you’re forcing people to sell toilet paper at the same price as they were before, you’re actually distorting the market, you’re messing it up because prices fluctuate with supply and demand and people’s own subjective values. So super interesting. I will make a plug here. If this topic is all of interest to you, you might be interested in the economic curriculum that we provide for kids of all ages called Free Market Rules, and you can find that@freemarket.tuttletwins.com. We will also link to that in a couple of other resources about pricing and price gouging on today’s show notes page, which you can find at tuttletwins.com/podcast. Make sure as always, you are subscribed to the podcast, Share it with your friends. We’d love to have even more families and kids learning about these ideas. Check out that curriculum if it’s of interest to you, to learn even more about the free market, and the nuts and bolts of how economics works. And until next time, Britney, we’ll talk to you later

Brittany: Talk to you next time

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