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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Sellers set prices, but buyers set the actual value via transactions in the market itself by being willing to partake in purchasing.
When we think about the cost of something, what needs to be evaluated in particular is the materials and labor costs associated not to just the product or service itself, but everything leading up to it. All of the supply chain overall.
Why businesses change prices to match perceived value and maximize returns is important for the survival of the business. While there may not be a need to maximize profits one year, it is important to try and maximize cash reserves to stay relevant because:
1.) Disasters can happen. From crazy external factors like a pandemic, governmental changes, or a freak accident turned lawsuit, having money saved up for a rainy day can be the difference between keeping things going or having to close Shop and fire all your employees earning a living under your banner.
2.) It can buy you time when cost of production changes wildly. If your gizmo needs parts or raw materials and those change radically in price due to a shift in business from your suppliers, global shortages or competition, labor cost changes, etc., cash gives you time to keep thing as they are while navigating how to solve the problems at hand. This keeps your existing talent and doesn’t require a price change *yet* while market research is performed.
3.) It can save you from competitors entering the market. If suddenly a competitor shows up with a similar cheaper product or better product, your product’s value can drop. This cash buffer lets your company throw more money at expenses like R&D and marketing to regain market dominance so that you can sustain paying the bills. A price increase from a previous year when people still think your product is worth the cost due to its value can inhibit a loss of market share.
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