Question from a reader:”I’ve heard about exhaustion of resources, what is that about?”
My answer is:
What do you do when you run out of oil, money, gold, wood or any resources in a business? You look for other sources of resources or substitutes. You hope that you can get the resources at a reasonable price or else you have to raise your prices or seriously think if you want to stay in business. If you take a look at any types of small businesses, they mirror governments and big businesses.
Let us say for example that you make wooden tables. You set up in a lush forest a house and you start making wooden tables. They get to be pretty popular and everybody from the village starts to buy your tables. Other craftsmen see that you are making money with your tables and set up houses near you. Pretty soon, business is great and there are more craftsmen near you and you end up using all the wood from the forest. No problem, you start getting wood carted in from a nearby forest. The problem is that it starts to cost a little more so you start to raise your prices just a bit.
A craftsman in another town sells tables cheaper than you because he hasn’t exhausted his forest yet. People start to go there. What can you do to compete? You need to find a cheaper source of wood to make your tables with. So you start working deals with other places to get cheap wood in exchange for some free tables. You can lower your prices a bit.
Now, let us add another layer. Let us add a marketplace that actually places values on your wood and causes the value to go up and down. You may go this marketplace and buy promises or futures that the price for wood will be fixed at a certain point to guarantee that you will have wood to make your tables with.
Now, suppose that there are other buyers and sellers who sell imaginary shares of bundled futures of wood and they ultimately have to make due at one point or another and buy the wood they are claiming they own or sell wood that they own.
Let us now assume that everybody has enough wooden tables. People don’t need as many anymore. Your inventory of wood starts to grow and you have to drop prices to start moving tables. Your competitors do the same and some of them go out of business because they can’t pay their bills.
The preceding example was an oversimplified one but that pretty much sums up the marketplace for resources. Prices, unless managed by market makers, tend to adjust based on supply and demand for goods and services. Once a resource is exhausted, some sort of cost has to be expended to start getting fresh resources, or to research new ways of making tables (maybe stone or plastic instead of wood).
Kim Isaac Greenblatt
The profitable blog talks about exhaustion of resources.
Tags: Business, exhaustion of resources, gold, oil, profitable
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