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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Think of it like an auction.
If the bidding on an item starts at $1, and there’s only one person bidding, then you will sell 1 unit for $1 (low supply, low demand).
If the bidding on an item starts at $1, and there are two people bidding, you will sell 1 unit for more than $1 (low supply, high demand).
If the bidding on the item starts at $1, but there are thousands of similar items and only a few bidders, the units will likely not move at all, and thus the price will drop to make it more enticing for the bidders (high supply, low demand).
The economy is just this on a much larger scale.
You could very well try, but the market will make the correction without you. Take a look at what happened with the PS5. Supply was short but Sony didn’t raise the price. What you had happen was people buying at the store for below “retail price” and selling for “market price” which was a lot higher. So the market functioned exactly as expected, correcting itself.
Sony did this. The PS 5 was in short supply. They kept the price stable. People with connections or luck got theirs (and maybe extra as well) and then started selling them to consumers that were not so lucky.
They actually do not “automatically” go up.
Instead, economics presumes markets are ‘bidding markets’ where we ‘bid’ for the items we want–and if someone comes along and is willing to pay more, they pay more. (Like the stock market.)
In actual practice, what happens is that we run out of things: we saw that over the pandemic when grocery stores ran out of groceries, for example.
*Eventually* sellers who constantly run out of stuff *may* raise their prices–and a number of sellers (like Amazon) constantly experiment with trying to raise their prices to see what people are willing to pay.
And *eventually* over time, if there are shortages, sellers may raise their prices for the long-term, which results in things like inflation. (Some markets, like commodities, incorporate bidding as an element to those markets, so [price discovery](https://en.wikipedia.org/wiki/Price_discovery) happens much faster than at a clothing store.)
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More often than not, most sellers try to set their prices at the cost to make a thing plus a small profit to cover their costs and provide a return to the investors who invested in that company. And that often means when something goes up in the short-term (like the cost of fuel), companies wind up eating those prices in the short term, and readjusting their prices in the long term.
Likewise, companies are reluctant to lower prices in the short term because they fear competitors will do the same thing and they don’t want to find out if their competitors are more efficient than they are.
But–in the long run–prices *tend* towards an equilibrium dictated by the supply/demand curve.
But the theory does not dictate how long it takes to reach an equilibrium: it may be milliseconds (like on most modern stock market exchanges); it may be decades (as we tend to see in retail).
Economics speak. For commodities resellers would arbitrage the goods.
In 5 year old speak. For things like corn, cars, PlayStation 5, bacon etc. If you don’t raise prices someone else will come along and buy your stuff and then resell it to someone else for more money and keep the profit. To the buyer the price is higher.
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.
Because in economics, we assume that people are rational and that suppliers will try to maximize profit at all times.
Look at concert tickets. What happens when they go on sale?
Scalpers buy them all up and resell them at higher prices.
That’s what happens when demand is high but sellers don’t raise the price. If they don’t, somebody else will.
You are an ugly girl and it’s prom night. You would sleep with literally anyone just to finally lose your virginity.
Somehow, all the other girls of your school die in an accident and you are the only female left. Now, far more guys want to sleep with you compared to before, so the demand is increasing.
Oh yes you could still be grateful and just sleep with the ugliest, like you would have before.
OR you’re smart, see the market power you have now, and choose this guy Denis from the football team that you never dreamed of having a chance with before. Thanks to increased demand.
Same with prices for goods.
You just asked why scalpers exist…
If they do keep the price the same, they will run out of supply, and the majority of the product will be resold on the secondary market. They are better off raising prices and keeping more of the $ for themselves… in theory.
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