The economic theory is extensive on this. You have to let the price float if you want the market to find the optimal way to increase capacity.
If you insist on the price remaining steady even when the market conditions have changed radically you are choosing shortages in order to satisfy your belief that the price shouldn't change.
Perfect way to guarantee shortages. Let the price float and there is an incentive for businesses to figure out how to increase the supply quickly, thus causing the price to drop.
The economic theory on this is rock-solid and yet it seems impossible to educate the general public or government officials regarding the consequences of price controls.
It ends up being a fallacy of composition in a system that is supply constrained.
What keeps prices under control in any market is that somebody with supply capacity loses out and doesn't use that supply capacity - because the price achievable doesn't make it worth using that supply capacity.
That's the issue we have at present. There is insufficient spare supply capacity available to be brought online if prices go up. The solution is shifting consumption to investment, but at present the short term view is seen as more lucrative than the long term one.
I feel like this should be fairly obvious business economics. If there is too much demand for your product for you to service, you should raise your prices until the demand matches what you can produce. It's basic supply and demand.
The opposite applies as well. If you have excess capacity that's going unused, you should lower your prices (down to the marginal cost anyway).
That makes assumptions that don't hold in the round. Once you have a lack of supply capacity such that there is inflation, then everybody can pass on the price changes and the amount purchased doesn't change.
That's the problem.
Somebody has to stand the loss, and for that to happen there has to be an expectation that you can't pass on the price shift somewhere in the cycle, which then forces that somebody to reduce the quantity purchased or shift it to an alternative supplier.
This reads like part of an Economics 101 textbook. If quantity supplied is limited and demand increases, the obvious solution is to increase the price enough to hold constant the quantity demanded.
High prices are exactly how the free market attracts additional resources to solve capacity problems.
Legislative efforts to limit prices pretty much guarantees that additional capacity will not be forthcoming and that shortages and high prices will continue.
Prices should increase in the case of increased demand. Prices must increase in that case if you want the supply to increase, which is the only way to actually meet demand.
That's correct, that's the kind of equilibrium that should be reached. I'm just pointing out that price increases can find from supplier costs going up, not just from increased demand.
According to standard economic theory, shortages only happen when pricing mechanisms fail.
If prices rise, then demand would lower and shortage will be resolved (?)..
If we're rationalizing this with economic principles, I think we can chalk it up to "imperfect information".
Also demand is static regardless of price changes. Quantity demanded is what changes. Apologies for the pedantry but don't want anyone reading too much here and making that mistake on a econ test :)
If you insist on the price remaining steady even when the market conditions have changed radically you are choosing shortages in order to satisfy your belief that the price shouldn't change.
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