Economics 201

Did you read my post on the price of Itunes music?

Nick has a follow up.

In fact, even if the number of buyers decreases as the price goes up (which logically it would), the company can still increase the cost, as long as the cost increase offsets the loss in profits because of fewer buyers. There is a theoretical point then where you can maximize the profit.

For instance, if you can get 100 people to but a song for $0.99, you'll make $99. But if 90 people are willing to buy a song for $1.25, you've now made $112.50! Why wouldn't a company want to charge $1.25 then? In fact, if they increase the cost to $1.50 per song, and only 75 people buy it, they still make $112.50. But if they jack up the price to $1.50 and only 50 people buy the song, now they've only made $75. The idea then is for the company to find the point where they can maximize profit. That's what sets the price, not supply and demand.

Supply and demand is certainly an important economic concept to understand, but it isn't what drives all decisions.

This is all correct, of course. But, the fact remains that if the world were made of gold, people wouldn't pay much for it. So, what is it about digital music that people are actually willing to pay $0.99 per song? Why is the RIAA trying to tell Itunes what the optimum price is? I assume that Itunes is in business to make money. They must know something about their market.

Can you tell that I don't use Itunes to buy music?

Economics is fun. Any arguement has an equal and opposite counter arguement. Personally, I think the laws of economics are more vague than quantum theory. At least physics equations work the same way every time and aren't subject to "market forces!"