BKaF - Brad Kovach and Friends

Situation: You’re sitting at your computer downloading stuff. You paid for it, and you received digital copies instantly. There were no humans, except you, involved, and there was virtually no labor involved in distribution.

Background

Supply and Demand is an economic concept that states that the best price for an item is found where a supply curve and a demand curve meet. It’s a very accurate way to determine how much to charge for an item–it’s the economic concept that drives the United States.

However, with globalization and the popularization of digital assets, such as a media file, the typical supply and demand curves are difficult–if not impossible–to chart.

The two parts of the S&D concept are, of course, supply and demand.

Law of Demand

When a price for an item is higher, demand for that item is typically lower. the relationship is inversely proportional. Basically–If people want something, they’re willing to pay for it.

Law of Supply

When a price increases, production must also increase to maintain profits.

Elasticity

Where changes in factors cause change in supply and demand relations an availability of a substitute is a great influence of Elasticity–if a competing product is stealing your business, you’ll change some factors (price, probably) to get them back.

You can see how a delicate balance of these laws would be good for the economy. This balance is referred to as equilibrium.

A recent example: The Nintendo Wii game console’s impossible-to-find status during the 2007-2008 Holiday season. Even at an estimated production of 1.8 million consoles per month, sales of over 400,000 kept the shelves wiped out.

An un-example: Fuel prices. They’re high because the oil companies want the money. Demand hasn’t risen, but it has fell due to high prices. But, if a dramatic decrease in fuel prices occurred, demand would raise–and then the price would have to skyrocket, yet again.

That’s great, but consider a digital economy:

Supply

Infinite. Rather than distributing goods, copies of the goods are automatically made and then distributed.

Demand

Variable, depending on the price set, and how the items are desired.

So does digital supply and demand exist?

Some say “No.” When using the traditional model of supply and demand, an infinite supply makes it impossible to calculate equilibrium–any calculator would return an ERROR.

But in a way “Yes.” You cannot sell a product without demand. Without demand, there would not be a buyer. Without a buyer, supply is not necessary. Therefore, without demand, supply is not necessary. You must have demand if you expect to sell your supply.

Therefore, an unlimited supply should not be factored into digital economics. Rather than a supply, a goal has to be set. How much did this production cost? And how many people do I expect to buy it? When those questions are answered, profit can be calculated.

Production cost:     $25,000.00  # I don't know how much money it takes

Desired cost         $      .99

Units Sold:              25,253
Actual Cost Per Unit	  $0.99  # Production Cost / Units Sold

Profit Per Unit	          $0.00  # Desired Cost - Actual Cost

Profit	                  $0.47  # (Desired Cost * Units Sold)-Production Cost

I built a digital economics toy that requires Microsoft Excel to play with. If you don’t have Excel, download this and upload it to Google Documents–the equations will work.

Digital Supply and Demand Spreadsheet

If you use Microsoft Excel, you can use the “Goal Seek” function to help you solve for values. In Office 2007, click “Data > What-if Analysis > Goal Seek” and set the values. You’ll find the calculator rather interesting.

The cost of producing these goods is the same for one item sold as it is for 2 million. The profit is what softens the blow. Interestingly, with these numbers, after 33,310,474.71 copies of this item, the Actual Cost Per Unit reaches $0.00.

Digital Rights Management (DRM)

One parallel that cannot be drawn between online items and real, tangible items is the ability to sell and redistribute.

For example, if I purchased a CD from… say… Wal*Mart, I could use that CD a few times, and then I could take that CD and sell it or give it away. Online-purchased media, however, comes in sealed-to-your-identity packages.

You have NO means of giving that digital media to a friend. You have NO means of selling that digital media back to the market in ANY way. If you decide for any reason that the product is defective, you can’t take it back, you can’t get a refund–because it’s impossible with the current state of online markets.

In Conclusion

I think that supply and demand exists in a digital economy–but not in the same way as it does in the analog world. Items must be sold to meet a quota, not to meet market demand. After the quota is reached, all earnings are PURE PROFIT. Products aren’t being sold to us in a fair way, either. Rather than having the right to distribute a digital product.