Saturday, November 5, 2011

N Theory versus Supply and Demand theory

N theory is a new economic theory intended to replace the Supply and Demand theory of price setting.  Negotiation is the basis of N Theory, hence the name.  Where Supply and Demand theory has a product focus, N Theory focuses on the people (Buyers and Sellers) in a purchase transaction.  N Theory is introduced in my new book, Rule of Money.  In the book I explain that Supply and Demand theory is limited in that it is only a two factor function, quantity and customer interest at a specific price.  The reality of the world is that there are numerous factors affecting the quantity of a product brought to market and the equally complex and diverse decision by consumers to buy a particular product.

I introduced N Theory, because Supply and Demand theory no longer reflects the reality of the diverse worldwide market for products.  Supply and Demand theory, also, does not reflect the differences in customer perspectives.  N Theory takes the economic prediction out of the office and makes it a recording of a purchase transaction.  The moment of a market transaction is the N Theory event.  It is when a consumer agrees to an offer made by the retailer. 

A merchant will set prices based on when a successful transactions occurs.   If the merchant sells 10% of his product stock in the first week he will probably lower his prices in the third week depending on his projected turn.  Likewise, if he sells 80% of his product stock in the first week, he will increase his product order the following week and raise his prices when new product stock arrives.  Obviously, the decisions the merchant makes is much more complicated.  Trying to predict the merchants decision with a mathematical equation is impossible, but what is possible is to record the marketplace results and select a product pricing strategy for the next batch.  Briefly, that is what N Theory is about.

Supply and Demand theory is not discarded in N Theory, but its role as the foundation of economic process is challenged.  Supply and Demand theory is just one among among hundreds of factors that affect product pricing.  It is time for Supply and Demand theory to step down from its pedestal and find its place among the average run-of-the-mill everyday factors. 

No comments:

Post a Comment