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Source link: http://archive.mises.org/17632/subjective-value-perhaps/

Subjective Value Perhaps?

July 7, 2011 by

The Wall Street Journal‘s Christina Binkley asks, “How Can Jeans Cost $300?” After all, “It costs about $50 to make a pair of Super T jeans, True Religion’s best-selling style with oversized white stitching,” Binkley writes.  The jeans fetch $152 a pair wholesale, and average $355 retail.

Binkley writes,

The answer can be found here in Los Angeles, in the global capital of so-called premium denim—one of the few areas of fashion that remains largely American-made. An industrial zone here near the city’s center is home to True Religion, J Brand, Seven For All Mankind and other pricey denim brands that have elevated what was once workman’s togs to a luxury industry all its own.

But the real answer is that prices are set by consumers’ subjective values.  The value of products does not reside objectively and intrinsically in the goods themselves, apart from the individual who is making an evaluation. “His valuation is a subjective matter that even he cannot reduce to objective terms or measurement,”  explains Thomas Taylor in An Introduction to Austrian Economics.

If a consumer spends $355 on a pair of jeans the only thing we know is, that particular consumer values the jeans higher than $355 at that moment.

Like any good, the production of jeans requires inputs from a number of different suppliers.  No one could create and manufacture all the components to a pair of jeans.

Binkley writes,

As with all fashion, a big part of the price of luxury denim is in the multiple profit margins taken at each level of production. Most any piece of clothing contains parts and services from potentially dozens of providers: from fabric and button makers, to designers and seamstresses, and wholesalers and sales agents. After all this, designers and retailers say the typical retail markup on all fashion items, including jeans, ranges from 2.2 to 2.6 times cost.

The marketing costs are high to convince the young and hip to splurge on jeans. Binkley points out the high-end denim market was thought dead a couple years ago.  So while True Religion is moving 4 million units for the moment, consumers are fickle and they decide what goods can be priced at.

True Religion’s Jeff Lubell says he could price his jeans at $40 if he manufactured in China instead of Los Angeles.

When the easy money stops, he may have to think about that option

{ 20 comments }

Bruce Koerber July 7, 2011 at 7:33 pm

It is interesting how subjective valuation works. In the mind of the buyer all things are weighed. If the mind has been twisted in any way by a pseudo-education then of course the decision will be different than if it had received an education fit for a noble-minded individual.

nate-m July 7, 2011 at 9:45 pm

The first thing that should be taught in school about economics is:

“”"The price of a good is, ultimately, set by the amount that people are willing to pay for a good. Scarcity and cost of manufacturer can play a role in how the price of a item is initially set in a market place, but the reality is that unless a good can be created and sold at a profit at the price people are willing to spend to purchase it then it will not be created. Therefore, in a free market, consumers of a good ultimately control the production of goods through their price preferences. This works similarly at all levels of a economy and all scales.”"”

This should be taught as the one great truth of economics. This sort of thing should be drummed into the heads of people since grade school so that if they learn anything they learn that.

Understanding this will go a long way to avoiding the shit government policies that we are faced with today. It would demolish all sorts of foolish thoughts.

C. Rakish Spagaletto July 8, 2011 at 8:31 am

I don’t see what foolish thoughts that statement will demolish. Can you elaborate?

nate-m July 8, 2011 at 10:22 am

Stuff like:
“How Can Jeans Cost $300?”

Or for more sophisticated folks; the idea that having a central bank set interest rates for intra-bank loans is a good thing for the market.

JFF July 8, 2011 at 9:24 am

This is still just a subset of Hazlitt’s “One Lesson.”

nate-m July 8, 2011 at 10:20 am

yes …

Giovanni P July 7, 2011 at 8:50 pm

Something I don’t understand — despite seeing it happening — is how, how the owners of the clothing stores and supermarkets know the right time to change (to rise, almost always) the prices of stuff.

Thank you for your compassionate and kind answer, dear reader.

Bruce Koerber July 7, 2011 at 9:23 pm

It is by constant trial and error.

nate-m July 8, 2011 at 4:18 am

They are professionals. People who set prices at stores spend their working lives analyzing this subject and if they are not successful then they will drive their clients out of business, lose their jobs, and so on and so forth. If they are successful then they will increase profits and get benefits for it.

If we had a the ability to accurately describe what it takes to arrive at the most profitable prices for a retail outlet then we would all be very rich men. :)

Topher July 8, 2011 at 6:50 pm

Some of the bigger retailers or supermarkets have people on the payroll to scout out their competition’s prices for items they sell by skimming through ads, or going into their stores and photographing the pricetags for various items. This is one reason why prices will rise and fall together even at competing stores- all it takes is one store to figure out that they are losing money on an item that isn’t meant to be a “loss-leader” and other stores note the price change and look into the matter as well.

Supermarkets have razor-thin margins. They have to be constantly calculating and re-calculating because even minor fluctuations in input prices can cause an item to sell at a loss or at significantly more than a competitor.

Capn Mike July 7, 2011 at 9:01 pm

I love the way she laments the “profit taking” of the suppliers to the Jeans company. So, why don’t they (the jeans company) make all their own components??? Maybe cause it’s cheaper to buy them rather than open up a button factory???
Division of labor, anyone??

So this bimbo writes for the JOURNAL???

God help us all.

Shay July 8, 2011 at 12:40 pm

Note the extraneous apostrophe in her opening sentence:

It is an enduring mystery to anyone reared on $50 Levi’s: How can a pair of jeans cost as much as the Phantom [...]

Mitch Kordonowy July 8, 2011 at 3:45 am

What is so utterly scary is how many people do not get subjective value. The comments on that article are the usual ‘only a moron would buy $300 jeans’ etc…
I’ve also seen someone bitch about how it’s a private company.
I even saw some semi-aware people talk about how its such a big margin. I had to stop reading them for fear I would really see people say something to the effect of “We should have laws to stop this atrocity!”

Mitch Kordonowy July 8, 2011 at 3:53 am

I should say they “get it” but are not aware that subjective value moves their choices too.

Marissa July 8, 2011 at 2:36 pm

Well, I do think only a moron would buy $300 jeans (unless they had gold buttons or something). People who are obsessed with fashion don’t tend to be incredibly smart. But I say good for the people of this company who are feeding their families and getting rich off the principle P.T. Barnum espoused a century ago!

Shay July 8, 2011 at 6:57 am

You cover the markup made by the middlemen, above the cost of the material inputs. Often this is derided as unnecessary and illegitimate, as in the WSJ article you mention. It’s interesting to apply this concept of markups to the entire process, rather than arbitrarily stopping as the WSJ article does. We start with materials from the ground/air that have no inherent cost, and then the one who extracts them adds a markup, and passes it on to the next person, who adds another markup, etc. Thus as far as I see it, every penny of the final cost is due to markups, not inherent cost. Every single one is valuable, since it communicates information about supply and demand. Thus, the markups in the final few steps are just as legitimate as those at the beginning, serving the same purposes. Now I won’t fall prey to critics like the one in the WSJ article, or the common ones I see of how little Apple products cost to make as compared to their selling price.

Marissa July 8, 2011 at 2:37 pm

With Apple there is also the high cost of research and development built into prices. Also, companies like to make money, so God forbid they markup their prices.

Ron Brown July 8, 2011 at 8:21 am

For the Wall St Journal to hire and continue employing someone as economically ignorant as Ms Binkley also exposes the level of economic ignorance of at least a significant portion of its readers. Otherwise, revenues would fall and Binkley and others like her at the journal would be unemployed.

Walt D. July 8, 2011 at 4:16 pm

With State run education and teacher’s unions, you can’t expect anyone to understand even rudimentary economics.

how to get rid of a mole August 8, 2011 at 12:53 am

Excellent post however , I was wanting to know if you could write a litte more on this subject? I’d be very grateful if you could elaborate a little bit further. Cheers!

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