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Actually what you are talking about is the change in the quantity demanded (which strictly moves along the aggregate demand curve and is solely a function of price). The aggregate demand curve is not determined by price but rather the inherent demand for a product in society at any given moment. Any economics textbook will tell you this and is frequently misinterpreted. Let's use the potato chips example. A change in price affects quantity demanded as you say in your post. But let's say everyone suddenly becomes health-conscious thus reducing the aggregate demand for potato chips. Price plays no role in this situation because an external factor has changed the inherent aggregate demand for potato chips. Quantity demanded is wholly different from aggregate demand becuase they are functions of two completely different variables.
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<p>When I say 'demand', I am not talking about the shape of any overall curve, but simply the amount of a given product that is demanded at a given price. That amount is frequently zero for many potential products and at many prices, such as the million dollar potato chip. If I wanted to talk about the shifts of curves, I would have specifically discussed curves. </p>
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Microsoft may make enormous profits but they truly do create enormous value for society. The profits come as a result of the value they create, NOT from selfish greed of executives that charge customers through the nose.
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<p>Ha! I, along with many IO economists, would actually argue that Microsoft actually bolsters my*case: that Microsoft prospered *in spite of not actually providing much value to society, and in fact, arguably providing negative value. Let's face it. Microsoft is not most successful computer firm in the world, as measured by market cap, just because they 'create value'. They are successful because they control not one but two monopoly products (the PC operating system and the PC office productivity software suite), both of which are interlinked and hence reinforce the other. </p>
<p>Nor did Microsoft simply stumble upon these products via sheer luck. Rather, Microsoft actively managed its product strategy in order to claim and repeatedly strengthen its monopoly hold. For example, Microsoft signed exclusionary deals with OEM's such that Microsoft would be paid a Windows license fee per PC shipped whether those PC's were loaded with Windows or not. In other words, if a manufacturer such as Dell wanted to ship a PC with IBM OS/2 or any other alternative OS, they still had to pay Microsoft for Windows. Since they would be paying for Windows no matter what, PC manufacturers logically concluded that the optimal course of action was to simply offer only Windows loaded PC's. Microsoft also probably leveraged its Windows monopoly in order to dominate the office productivity space by providing its Word/Excel (later MSOffice) developers access to undocumented API's that developers of rival office productivity software packages, such as the previously dominant WordPerfect and Lotus 1-2-3, did not have. And, of course, most famously of all, Microsoft attempted to sandbag Netscape through predatory competition via IE Explorer, and in fact succeeded - Netscape's previously 90+% market shape dwindled to the mere single digits and the firm was eventually sold in pieces to AOL and Sun. Yet in the process, Microsoft narrowly escaped divestment from the courts for anticompetitive practices. </p>
<p>Each and every one of these practices has generated tremendous value for Microsoft. However, it is highly questionable as to whether they generated value for society as a whole. The net balance of value that Microsoft has provided to society as a whole is therefore highly unclear. How much choice has been robbed from the consumer because Microsoft has deliberately and repeatedly extended the strength of the monopolies of its markets? How much innovation has been squelched because other firms simply would not dare to develop a product that might compete against Microsoft, and the brave few that did, such as Netscape or SSI (WordPerfect), were mercilessly crushed and hence seen as examples not to be emulated? </p>
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Another way to do so is to emulate a company like Craigslist, which makes a relative pittance in profit (but could make billions on billions if the founder chooses to charge for it) but creates enormous value to society. It's an entirely viable business that makes a non-trivial sum in salary for the founder but a conscious choice was made to create a product that creates value if not money. You can aim to follow this model if you are philosophically against the idea of making money.
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<p>Interesting that you would say that, for I would again invoke Microsoft as the counterexample. Gates & Allen founded Microsoft with the express intention of charging for software - a novel idea for the time, for almost all software packages in those days were usually sold for free or only a nominal cost, with the vast majority of the profits in the computer industry to be garnered from hardware sales, or from hardware/software bundles. The notion that one could found a highly profitable company that sold only software was an unusual concept to say the least. In fact, Bill Gates famously wrote the 'Open Letter to Hobbyists' that not only decried the rampant copying and unpaid usage of Microsoft's software products within the hacker enthusiast realm, but asserted that the industry should move to a paid software model with intellectual property ownership. Microsoft was therefore at the vanguard of a movement that turned the previously free and collaborative software community and ethos into a true market of firms that charge for their products and can generate immense profits. </p>
<p><a href="http://upload.wikimedia.org/wikipedia/commons/1/14/Bill_Gates_Letter_to_Hobbyists.jpg%5B/url%5D">http://upload.wikimedia.org/wikipedia/commons/1/14/Bill_Gates_Letter_to_Hobbyists.jpg</a></p>
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Making a product to serve a need is not a byproduct of making money... Making money is a byproduct of serving a need.
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<p>No, I (and theprestige) still have to disagree: making a product is a byproduct of making money. Since rs288 brought up the example of Microsoft, I will continue to mine that rich example because it actually demonstrates my point. Steve Ballmer once famously said that if Microsoft could figure out a way to generate profit without ever having to ship any code at all, they would do it. </p>
<p>And in fact, sometimes that's essentially what Microsoft has done: taken the same product and sold it as two different versions. In fact - and directly contrary to your assertion that good businesses exist to serve its customers first and foremost - Microsoft took its original product and deliberately crippled it in order to develop a version for the lower-end market. For example, the high-end Windows NT Server and the lower-end Windows NT Workstation are the exact same piece of code! The only difference is that Microsoft has simply configured Workstation to be less capable so that customers won't use it as a server, i.e. by gating the number of simultaneous connections it can handle. But it's the same code! Those customers who want a server will have to buy the higher-end and higher priced NT Server package, which is the same code, but with the restrictions removed. In other words, Microsoft has deliberately made its products worse in order to generate more profits. But you can't argue with success, as Microsoft has the largest market cap of any computer firm in the world.</p>
<p>Nor is Microsoft the only example. The computer industry is replete with firms that have deliberately reduced the quality of their products in order to generate more profits. For example, Wolfram's Mathematica software package used to be sold as both a professional grade and a 'student' version which were exactly the same code, the difference being that the student version deliberately chose not to call the PC's math co-processor (which used to be a separate chip from the main microprocessor) so that the computations would run slower. The more expensive IBM LaserPrinter could print 10 pages a minute, whereas the cheaper LaserPrinter Series E could print 5. Yet the Series E was the same as the regular version, but with one extra chip whose only purpose was to slow down the printer by introducing wait states. In other words, IBM spent development dollars to deliberately make its own product worse. </p>
<p>Nor are these examples restricted to the computer industry. Many airlines will famously charge a higher price for round-trip fares to passengers who can't or won't subject themselves to certain travel restrictions such as weekend stayovers, despite the fact that little if any extra cost is imposed on the airline itself. For example, I would probably be charged much more if I booked a round-trip fare that left Monday and returned on Friday than if I booked a trip that left Monday and returned in two Fridays. According to the airline, the cost of serving those two itineraries is basically the same: I need one Monday seat from A to B, and I need one Friday seat from B to A, and flight on one Friday costs the airline probabalistically the same as on any other Friday of the year. So it's basically the same product for which the airline will charge vastly difference prices. Furthermore, as I said above, some firms will choose to deliberately reduce product quality. For example, FedEx will offer to deliver your package to your destination at 10AM the next morning, or the afternoon of the next day. Even if you choose the latter, your package will almost certainly nevertheless arrive at the FedEx warehouse hub early the next morning and ready to be delivered by 10AM, because FedEx runs an integrated distribution system that ships all of its packages together. But if you didn't order the 10AM delivery time, then FedEx will deliberately choose to have the package sit in its warehouse until the afternoon, despite the fact that the morning trucks are going out anyway and could deliver your package. In other words, FedEx actually chooses to schedule 2 separate delivery times (morning and afternoon), when they could just as easily deliver everything in the morning. Similarly, when you choose to use 3-day shipping as opposed to overnight, FedEx often times could probably nevertheless deliver the product overnight, but instead will often times just choose to deliberately have the package sit around in its warehouse for a few days before it is delivered. </p>
<p>Now, obviously, the idea is that the companies simply don't want everybody to buy the "lower-quality" product. Companies want to be able to price discriminate amongst their customers by charging higher prices to higher-end customers. But this has nothing to do with 'serving customers, first and foremost'. If anything, you are deliberately hurting customers by taking an existing product and actually reducing its quality, like IBM adding a chip to its LaserPrinter to actually slow it down. </p>
<p>The_prestige talked about some of the behavioral aspects of marketing. Such a list surely would not be complete with discussing certain music that restaurants/bars will play in order to induce you to eat faster so that they can turn over the tables faster and hence serve more customers, driving up revenue, and certain smells that supermarkets strategically waft (i.e. the smell of freshly baked bread) in order to make you hungrier and hence buy more food. Then of course there is the most insidious form of demand generation of all: the merging of marketing with culture, or what a direct outgrowth of what economists would call a combination of 'positional goods' and 'sign value'. Surely we all remember how girls in high school would try to 'outfashion' the others by buying the latest fashion trends basically in order to compete to be the 'coolest' and most popular. But this is an inherently zero-sum game because obviously only one girl could be the 'coolest' girl at school, and so girls would spend endless amounts of money constantly trying to one-up each other in terms of buying ever more trendy clothes. What was worse was when some girls I know had to beg their parents for money so that they too could buy 'cool' clothes, because they knew that if they didn't, they would be socially ostracized and bullied {the high school social stratification system was quite brutal.} Similarly, fads in kids toys were often times so strong that if you were the only kid in school who didn't have Pokemon or Bratz or whatever, you would be mercilessly taunted. You see this within the hip-hop culture, with rappers singing about driving Cadillac Escalades, Maybachs, and Bentleys; drinking Cristal, Alize, Hennessy, & Courvoisier (Busta Rhymes); wearing Burberry, Timberland, and Nike Air Force Ones (Nelly). Nobody really needs those products, but their frequent mentions in hip-hop vastly increases their demand due to their implantation within hip-hop culture. Nor am I simply talking about artists endorsing products that they honestly like. Microsoft paid Ludacris to place an Xbox in one of his videos. Fabolous was paid to appear in a Reebok commercial despite the fact that he wears Nike's in real life. </p>
<p>Celebrity endorsements in general are a means of artificial demand generation. Does anybody really believe that George Foreman has any special insight into cooking, except for the fact that he's fat and hence likes to eat? Yet the George Foreman grill is one of the top selling grills in the world, and Foreman himself has said that he has made more money from his grill than he did in his entire boxing career, despite the fact that there is little logical reason to believe that the George Foreman endorsed grill is better than any other grill out there. Maria Sharapova doesn't know anything about photography or electronics, yet her endorsement of the Canon Powershot ("Make every shot a powershot!") was one of the most successful ad campaigns in recent times. Brett Favre endorses Wrangler, Dennis Haysbert endorses AllState, Peyton Manning endorses MasterCard, William Shatner endorses Priceline, Brooks Shields endorses Volkswagen. Let's face it: none of these endorsements should logically work, as none of these celebrities has any expertise within the product category they are endorsing. But it does work, as a case of generation of demand that would not otherwise exist at all. Somehow the fact that Maria Sharapova endorses the Canon Powershot camera creates demand for people to buy that camera. On the other hand, if my friend who holds a PhD in electrical engineering from MIT were to endorse the Canon Powershot, nobody would care even though he clearly knows far more about digital cameras than Sharapova does. That's because she's a celebrity and he's not. </p>
<p>And then of course there are companies that knowingly hurt customers by deliberately selling them dangerous products, the most obvious example being the tobacco industry. Tobacco has been one of the most profitable industries in world history - and in fact, was responsible for the economic success of some of the original American colonies such as Virginia and North Carolina, despite selling a product that we all know addicts and kills its customers. Smoking is the #1 cause of preventable deaths in the country. I would hardly call that a matter of 'serving your customers'. Similarly, the economic viability of the later days of the British East India Company was predicated on the opium trade, eventually culminating in the Opium Wars in which China was forced to succumb to legalized opium usage amongst its populace, which ultimately resulting in a whopping 27% of the Chinese male population becoming addicted. Again, I would hardly call that a matter of 'serving its customers'. More like killing its customers. But what can I say? It made the British East Indian Company - and by extension, the British Empire - supremely wealthy. </p>
<p>Look, business is business. Business is about generating profits, first and foremost. Sometimes that involves serving your customers. Sometimes it actually involves screwing your customers, such as a company deliberately lowering the quality of its products, selling a product that is actually dangerous, or simply generating artificial demand where none would naturally exist (again, how exactly does Maria Sharapova manage to convince people to buy cameras?). That's business.</p>
