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?
In: 821
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.
Latest Answers