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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: jimmg who wrote (76018)	12/19/2006 12:43:17 AM
From: mishedlo	Read Replies (1) of 110194

Sales prices for any tradeable good can never go below marginal cost to produce that good unless the sale is coming from existing inventory (essentially a sunk cost). Once existing inventories are depleted, production won't occur unless the sales price exceeds marginal cost to produce. I learned that in econ 101. You are correct over a very long haul (it depends on capitalization). But the point is there is a ton of EXISTING supply and EXISTING production (ie overcapacity) and if costs rise (say rent or insurance or paint for nail salons) rises faster than demand, or demand drops faster than costs. Then good luck selling that good or service. Cost is irrelevant in that regard. Yes, no one might start such a business, but many are going to find they are in that position anyway. All it takes is falling discretionary spending. If demand at a certain price point drops and if production costs do not drop as well then that business is in trouble. The amount it costs to deliver the good or service does not matter one bit. Once again I believe we have overcapacity in damn near everything and it is going to get a lot worse for discretionary stores as time goes on. Oddly enough as traffic drops (and it will) they will NEED to RAISE prices to meet their nut. It wont happen. What they NEED and what they get will be two completely different things. If demand for nails drops off at $20 the nail salon owner is not going to get it, because his costs are not relevant to the buyer. I confidently predict massive bankruptcies at all kinds of places: restaurants, nail salons, etc etc. Just as an aside (possibly far fetched possibly not) What would happen to prices if Walmart started putting nail salons or doctor's offices in the back of their stores somewhere? Would walmart care what the nail salon owner's costs are? Would the customer feel sorry for the nail salon owner? Enough to pay triple the amount? Mish

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