the concept of inflation. When central banks increase money supply, prices rise..ok. But please explain the underlying mechanics, how do retailers know to increase prices?

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the concept of inflation. When central banks increase money supply, prices rise..ok. But please explain the underlying mechanics, how do retailers know to increase prices?

In: Economics
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Costs of raw materials rise, so the cost of goods manufactured rises. The cost for retailers to acquire those goods rises, so the sticker prices rise.

Let’s take as given that increasing the money supply increases the demand for goods. People have more money and want to buy more stuff with it (and if prices never changed – they would be able to!)

So then we’re talking any old supply and demand story. Demand for something rises (doesn’t matter why). More people are going to the store looking to buy that thing. Maybe retailers are having more trouble keeping it in stock. They realize that they can raise the price and still sell as much as they did before, so they do that. This keeps the price at a level where the number of people showing up to buy it is about equal to the number of products available for them to buy.

People selling stuff are constantly trying to raise prices. They stop when nobody buys the stuff they’re selling because its too expensive. If there’s more money in the economy overall, then everybody has a little bit more money to spend so stores can get away with charging a little bit more. Because stuff now costs more, people will demand higher wages to keep up with “cost of living” increases. In the end this usually evens out so that stuff costs more, but people have more money to buy it with, so there isn’t a problem. Inflation becomes a problem when it starts happening too fast for wages to keep up.

Alternatively, you can have a situation where stuff *actually* becomes more expensive, without an increase in the money supply. This happened in the 70s with the Oil Crisis. The lack of oil for fuel meant that less stuff was getting made, *no matter how much you were willing to pay*. This meant that the remaining stuff got more and more expensive as it got rarer and people competed for limited resources. However, there wasn’t any new money coming into the economy so there was no way for people to pay the increased prices. So it wasn’t typical inflation.

It’s the constant balance of supply and demand. It’s more of a pendulum than a fixed thing. If they are selling something at a cost and all the sudden more of it is being sold, they know they can raise prices until people are buying it at maximum profit. By raising costs you are increasing supply and decreasing demand. By lowering costs you are decreasing supply and increasing demand.

There’s back and forth in an economy. But from the manufacturer’s standpoint, you know you can increase prices when a lot of people are buying it. Then you can adjust your prices until your income vs. expense is where you want it.

However, you can’t price gouge for too long because increasing prices decreases demand. If things get too expensive people will stop buying, and then the manufacturers aren’t making any money even though they’re charging a lot. That’s why monopolies are bad for essential services (healthcare, education, food, banks, etc.) because people don’t have a choice but to pay – there is no competition in pricing.