I understand that demand-pull type of inflation is a result of companies raising prices when consumers have more money? But why would they raise their prices and not just enjoy the fact that purchasing power of the consumers has increased? Is that a result of some sort of inherent greed that you see an opportunity to get even more money by raising prices? Why not just enjoy the fact that many people can afford your product?
In: Economics
You want to sell your house for $600k
But 10 people have submitted offers for $650k-$750k
Why would you not pick one at random, forgo the extra $50k-$100k and enjoy their enhanced purchasing power?
Because supply-and-demand drives prices.
Businesses exist primarily to make money for their owners. Corporations are owned by shareholders, and if the business makes enough profit, they can give some of that back to the shareholders in the form of dividends. That makes shareholders happy and keep their money in that business, and attracts other shareholders.
There are many calculations that go into the prices business charge for their goods. They look at the market and decide how much they can charge without losing business to competitors or making customers not buy at all. They maximize the amount in order to make a profit for their owners and invest capital back into their businesses, or invest in other businesses. It isn’t “greed,” it’s duty to their shareholders. They aren’t charities.
The capitalist economic system is built on the assumption that every actor is always acting in their self-interest. In a system like this, what *is* greed? Every company is assumed to be trying to maximize profit, always. ‘Greed’ is the basic underlying assumption of all modern economics.
Why would someone, who’s entire career revolves around making the most money possible for their employer, *ever* just sit back and leave money on the table? Why would shareholders, who already have more money than is possible to spend but constantly accrue more anyway, *ever* tolerate an executive employee who makes less money for them than a different executive could?
Nothing stops someone else from buying your whole stock and promptly reselling the lot at a higher price.
> Is that a result of some sort of inherent greed that you see an opportunity to get even more money by raising prices?
A lot of people don’t seem to understand that this isn’t just common, *this is the thing that makes capitalism work*. Capitalism weaponizes the greed of human beings to efficiently plan the economy.
>Why not just enjoy the fact that many people can afford your product?
Just because more people can *afford* your product, doesn’t mean that more people can *get* your product. If more people are trying to buy the same amount of goods, and the price doesn’t increase, that means that you’re going to run out of product before you run out of customers. There’s now a shortage of the product. Of course, companies could expand production, but that takes money. You need to hire more workers, buy more equipment, rent a bigger property. The money necessary to expand, to actually make *more* products, not just cheaper products, comes from the higher profits you get by raising your prices.
If people have more money, but the amount of goods available for them to purchase doesn’t increase, either companies will raise their prices, or someone else will see the opportunity and scalp the products for a profit.
Consider a PlayStation 5, which was very difficult to get a console at MSRP for some time. Sony couldn’t produce as many consoles as were demanded. However, stores continued to offer them at MSRP. Scalpers came along, realizing that they could make a tidy profit by buying as many as they could and then reselling them at a much inflated price.
It’s the same problem, when there is less supply than demand, the price will go up one way or another until supply matches demand.
If you have a lemonade stand and you’re selling cups for $1 and your customers are signifying to you they would be happy paying $2, what are you going to do?
Hardly considered “greed” to maximize your income. It’s not greedy when a person does it or when a corporation does it, unless in doing so you create a bad experience for another human.
> But why would they raise their prices and not just enjoy the fact that purchasing power of the consumers has increased?
Because you only have so much supply. Let’s say you’re selling 10 widgets for $10 each. You can only make 10 per day and you sell out at the end of the day each day.
Suddenly, people want more of your widgets. There’s a line out the door and you sell out in the first half hour of your day. You want to scale up production but that’s gonna take a few months and even then, you can only make an extra 2 widgets per day.
So what do you do? Do you stand idly by and don’t change the price? Or do you raise the prices so you still sell out each day but you make more money?
Because more money means more money to do things like expand your business and make more product.
Or, consider that people might have more money because they’re getting paid more, and the business is either also paying more or will soon need to pay more to retain its workforce.
Flip it around:
You work for a company that is seeing profits increase in a good economy and gives raises to its employees to ensure they retain them. Is it greedy to accept more money for the same work or is it just good sense to take the money? You’re selling your time and labor, and they’re willing to pay more for the same product.
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