Supply and demand

This is a concept that I always have trouble with. I get the basic principles.

If the demand goes up, the price goes up and the supply goes up too because everyone is trying to fill the demand. If the supply is limited, the price goes way up because people are willing to pay more to get the product. But, more often, the price goes back down because the market becomes saturated. Then, all the people who invested in supplying the product start feeling a pinch because they cannot get sufficient compensation.

The part I have trouble with is that when the supply exceeds the demand, the price is supposed to go down. Sometimes it does but it seems like the price never goes down to where it was before the demand caused the price to go up. Most times the price just drops a small bit but remains much higher that it was before. I think this is called inflation but we are told that we are not in an inflation period.

I can’t get rid of the feeling that I’m missing something.

D.D.

COMMENTS

  1. Dezri wrote:

    What you are missing is that the Fed has been messing with the formulae that figures inflation! They are deceiving the country to make themselves look good. We have been in an inflationary period for a long time.

  2. Rich Flynn wrote:

    Sorry David but you are a victim of the educational myth perpetuated by Economics 101. The premise of supply and demand only works when there is substantially more supply than demand.

    In the real world, when supply (actual or controlled) is barely adequate any one with 10% of the supply controls market pricing. If the supply is 105% of demand and the supplier with 10% raises prices to double their profit, they will sell 5% but make the same profit as if they sold 10%.

    Then all the suppliers in the market place see that the prices have risen at a competitor and greed takes over. All the suppliers then raise their prices.

    OK, maybe the numbers aren’t real, but the concept applies. If you’re skeptical about this concept, explain why we’re paying $4 a gallon for gasoline.

    So now you’re asking “Why can’t I raise my prices to earn a decent profit instead of just barely surviving?”

    There are several answers.

    First, the supply is probably about 150% of the demand.

    Second, your percentage of the supply isn’t large enough to control pricing.

    Third, and this sounds totally stupid, “Nobody ever went out of business willingly.” People trying to remain in business will do almost anything to survive. These marginal profitable businesses will bid jobs at break even hoping to pick up contract changes or just enough to keep the lights on.

    Anyway, that’s a view of economics 101-A from a street kid from Brooklyn.

  3. Chuck Riccardo wrote:

    We are being told that there is not inflation but there actually is inflation. The Obama gang has a new game. If the price of an item goes up – remove it from the inflation index and replace it with something who’s price has not gone up. God help us all…

  4. Alan Blough wrote:

    Here’s what you are missing. If the value of money stayed the same, the prices would not be inflated. I remember back when AMERICAN-made jeans were $25-$35 a pair. Slowly these companies moved their production over-seas, but somehow the price stays the same. Why? Well, the value of the dollar has dropped precipitously over the years, do in part to unpegging it from the gold standard. This means that insted of one dollar(paper) being considered worth one dollar gold, you have a dollar worth, what 20 cents or less? It makes exporting easier because the dollar is weak. As far as domestically, it stinks. How would you like to pay 35 cents a gallon for gas, $7000 for a new car and $20,000 for a nice house? Of course your wages would be down to $1.50 per hour.

  5. Doug wrote:

    What everyone is missing is called “greed”. That’s why the price does not go back down. The corporations just pocket the extra money. .

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