Daily Archives: November 25, 2011

De-Mystifying Economics

A few months ago, Bob Rudzki pointed out a great article on economics that appeared over on the Talking Points Memo (TPM) site this summer where the CBO Schools Tea Party Freshman on Basic Economics.

The article, which reprints a letter from Douglas W. Elmendorf, CBO director, starts off by noting that changes in government spending can affect the economy in two different ways: in the short term, by changing demand for goods and services and over the long run, by changing the potential supply of goods and services. Then it goes on to note that economic activity can deviate for substantial periods from its potential level in response to changes in aggregate demand and that increasing government spending can increase aggregate demand and thereby narrow the gap between the economy’s actual and potential levels of output. But most types of government spending have this short-run effect on demand and changes in government purchases and transfers create demand-side effects that are usually only temporary because they raise or lower output relative to what it would be otherwise only for a while because, over time, stabilizing forces in the economy tend to move output back toward its potential.

In other words, government intervention has only a temporary effect and can not be depended upon to increase demand for your products in the long term. In order to increase demand, you need to understand that demand — which is the desire to own, the ability to pay, and the willingness to pay — is dependent upon price point. It could be the case that while only 100 people want your product at $100, 100,000 could want it at $80.

Thus, if the organizational goal is to increase demand, the price point will have to be effectively lowered — and if the organization is going to get through tough times, it’s going to be dependent upon supply management to either reduce costs, increase quality, or find a way to offer more (value-add) features without increasing the price point. That’s why supply management is one of the most critical functions in today’s enterprise and why they need better tools and technologies to achieve their goals. And a few SCRAPS to help them keep the focus to get there.