Why is it that in economics, when demand is greater than supply, prices “automatically” go up? Isn’t it sellers that decide to raise prices because buyers are willing to pay more? Couldn’t sellers choose to not raise prices?
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Of course they could. But now you’ve got a shortage. Instead of selling to the people who agree to pay more, you sell to the people who get to the store first. You still have 100 customers who want to buy that product, and only 50 things to sell. Somebody’s going to be unhappy. Somebody’s not getting the TransGoJobot for Christmas.
You could choose not to raise prices, but chances are someone will raise prices because people like money, and they’ll sell out even though you’re selling cheaper because there isn’t enough of the product to go around. Eventually you’ll realize that all you’re accomplishing by keeping your price low is losing money, and you’ll raise prices in line with the market
Prices don’t “automatically” go up, it is still a choice on the part of sellers to raise price.
But for prices not to go up, it would require sellers to act against their own self-interest by selling their products for less than buyers are willing to pay, and that’s a major assumption of most basic economic theories.
Economics is based upon the premise that participants making choices. So of course they could.
Sometimes people act in ways which economics would not predict.
Something that’s missing from the answers so far is “increasing marginal costs”. This means that each additional unit costs more than the last to produce.
This makes sense in a lot of circumstances. If you’re digging coal you start with the easiest stuff, and then move on to the deeper and harder to reach coal. If you’re hiring lawyers, you start with the best and most efficient, and then move on to the ones who aren’t as good or want to be paid more.
So if more units are produced, the cost per unit goes up and so does the price.
Now this does make a bunch of assumptions. For example it doesn’t apply in quite the same way to monopolies (they can choose either their price or the quantity sold). It doesn’t apply when there are economies of scale – meaning costs per unit go down the more you produce. These are both biiiig exceptions.
(Another complication is that demand is based on price. This is why economists draw supply and demand as upward and downward sloping lines on a graph, with the “equilibrium” point where they meet, showing the price and the quantity demanded/sold. An increase in demand moved the demand line up.)
Yes, hypothetically this could happen, but what would typically happen is a secondary market would immediately form where some of those who purchased the limited supply first turn around and resell at higher prices to those who didn’t get there early enough, a practice called scalping. Few examples of when this happens in the US is for sold out concerts and high demand Christmas gifts on a black Friday sale.
> Isn’t it sellers that decide to raise prices because buyers are willing to pay more?
Incorrect. Sellers do not determine a price. The market determines the price.
Simple example, say Ford said it was selling all it’s trucks for $1. Everyone would want to buy one of these $ trucks. But there aren’t enough trucks to go around, so some of the buyers say “well, I’ll pay you $2 for the truck!” This flushes out some of the buyers who can’t afford the extra dollar, but there still are not enough trucks to satisfy demand, so some of the buyers go “well, I’ll pay you $3 for the truck!” and this flushes out some of the buyers who can’t afford the extra dollar, and so on and so on until the market settles at the fair market price for a truck.
Sellers have some wiggle room in there, but they do not determine prices in a vacuum. If you artificially made prices low you just end up with hoarding an shortages and illicit black markets
You can make 100 cakes per day, sell each at $10, there are 200 people every day willing to buy a cake at $10, so you sell 100 cakes every day make $1,000 each day.
Now out of that 200 people that want cake, 100 of them are willing to buy a cake at $20. You still make 100 cakes per day, but if you sell each at $20, you can still sell 100 cakes every day, but now make $2,000 each day.
Would you choose to not raise the price?
Free market economics is a signaling system.
If supply is lower than demand, producers charge more *because they can*.
This is a signal that entices new producers into the market to increase supply, until supply and demand balance out. Then consumers are less willing to pay the high prices, which sends a signal that producers need to compete on price, pushing it back down.
During times of extreme scarcity (e.g. after a natural disaster), some people argue against the prohibition of “price gouging” because it removes that signal – and allows people to easily hoard the limited resources. Whereas “gouging” would prevent hoarding while also giving incentive for producers to dump more supply into the market.
All forms of economic control interfere with this signaling system – price caps, minimum wage, subsidies, etc. – and economic policy is a complicated game of determining which policies produce enough of a benefit to justify the interference.
1. Why would you sell for less than people are willing to pay. If your boss offers you a 10$ an hour raise because people in your job are in high demand, are you going to say *’nah I won’t take it I choose not to raise the price*’?
2. Even if you don’t take the raise, if there is no one that has your skills it wont solve the issue of the demand for people with your skills. The only way demand will go down is if the cost for hiring someone with your skills goes up so high people no longer want it.
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