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
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.
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