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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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.)
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