Every “introduction to economics” book will have a chart showing the relationship between “supply” and “demand.” Pointing out that as supply (of a manufactured product) goes up, unfulfilled demand goes down probably sounds obvious, but the relationship works both ways — i.e. if “demand” goes down, then “supply” will decrease.
However the relationship between supply and demand quickly get “weird” in the real world when talking about specific products. The problem isn’t the relationship between “supply” and “demand” – no, the problem in “real world” applications is that there tend to be “alternative choices.”
For a real-world example just go to the “cereal aisle” of any “supermarket” in these United States. A well stocked supermarket will have abundant choices of various “breakfast cereals” – IF a specific type/brand isn’t available, then there are obviously alternative choices.
Of course ONE of the “alternative choices” is always “don’t buy breakfast cereal.”
Value
With that “economics 101” review out of the way, the “big picture” of “supply and demand” always includes a third variable: “price.”
Again, the “economics 101” textbook might have a dotted line pointing at the intersection of the “supply” and “demand” lines marked as “optimal price” but “real world” product pricing is REALLY weird/unpredictable.
The problem here is that “value” and “price” are not ALWAYS the same. That econ 101 text MIGHT have a chart labeled “price elasticity” — and maybe a nice equation but that isn’t important at the moment.
The “big picture” is that changes in price can impact both supply AND demand.
Remember that cereal aisle? If “consumer” has budgeted $X to spend on “favorite cereal” and the price of that product changes to $2X then they MIGHT decide to buy a different cereal (or not buy anything).
The “value” of the cereal didn’t change, just the “price” – and when value becomes less than the price (everything else being equal) the consumer will make an alternative choice.
Marginal Utility
Humans tend to be “predictably irrational” – which (for my purpose today) means that “pricing” can be used to manipulate consumer choices.
What is something “worth?” Well, the answer is always “it depends.”
e.g. How much would you pay for an umbrella on a sunny spring day walking in a park? How much would you pay for an umbrella on a rainy day when walking to a job interview?
Well, if you brought an umbrella with you, both times the answer is probably $0.
Walking in a park on a sunny day an umbrella might actually be a nuisance – so you aren’t even going to consider the purchase.
BUT if that job interview is for your “dream job” and showing up looking like you just walked out of a rainstorm isn’t an option – then paying a LOT for that umbrella becomes an option …
Price gouging
Now imagine that you are the person SELLING umbrellas.
If it is going to cost you $something to haul the umbrellas out of the park – and no one is buying umbrellas – you might start lowering your asking price. If folks see a “Free Umbrellas” sign then they might take an umbrella even if it is going to be inconvenient to carry …
If your “umbrella stand” is on a busy corner in “big city” then you will maximize your profits by adjusting the asking price based on the weather forecast. This is just “good business.”
The cool sounding term for adjusting price according to demand is “surge pricing.”
Is surge pricing “fair?” Well, as always “it depends.” Fair to whom?
The concept of “price gouging” implies taking advantage of folks in an emergency situation.
Getting caught in the rain without an umbrella is (probably) NOT an “emergency situation” – so the umbrella stand isn’t “price gouging” customers.
The real question on “price gouging” becomes “who gets to decide.”
The United States Constitution has a “Commerce Clause”(Article I, Section 8, Clause 3) granting the Federal Government the power to “Regulate Commerce with foreign Nations, and among the several States.”
Notice the “among the several States” wording equals “interstate commerce.” This is the clause that justifies the Federal gov’ment building INTERSTATE highways. However, Commerce within a State is going to be regulated by THAT specific State.
SO who gets to decide if something is “price gouging?” Well, if the commercial transaction is between citizens of the same State, then THAT State gets to decide.
If the commercial transaction is between citizens from DIFFERENT States, then the State where the transaction took place PROBABLY still gets to decide the matter. BUT a lot of high paid lawyers will probably argue about it …
Again, just charging different prices at different times is not “price gouging” – e.g. airlines have been doing that for years.
Modern technology has made “dynamic pricing” possible which isn’t good or bad – just another example of “caveat emptor”
Price fixing
That “econ 101” textbook might also have a section about “monopoly pricing.”
The basic idea being that if one entity has total control over a “resource”/product then that entity can charge whatever price they want. If it is one organization then this might get called “monopoly” pricing, if it is a collection of organizations the tactic might get called “price fixing.”
Is that good or bad? Well, obviously if “price gouging” is also taking place it is very bad. It is also possible that prices might be “fixed” low in certain areas to prevent competition entering the market – which would also be bad.
Now in a relatively free market – IF “price fixing” is going on, the unintended consequence might be to encourage alternatives.
This is why in the “real world” examples of “monopoly pricing” becoming “price gouging” are hard to find. e.g. The “monopoly price gouger” is going to encourage competition to enter the market – which will end their monopoly.
Add in that the gov’ment bureaucracy tends to be naturally slow and inefficient and by the time the typical “antitrust” case gets settled the “market” has innovated and ended the “monopoly.”
IF the goal of “antitrust legislation” is to protect/benefit the consumer then it (probably) doesn’t have a great list of achievements. I’m not arguing for OR against “antitrust” laws – just pointing out that they are not a “fairness” magic wand …
Again “competition” in the market if good for consumers – so encouraging innovation and competition should take priority over “punishing” successful companies for being market leaders.
“Price gouging” is always bad – but State governments are responsible for deciding who is “price gouging.”
Price fixing may or may not be price gouging – but neither one is legal. “Price fixing” requires a cartel/coalition within a market –
The chances of a “secret cartel”/cabal manipulating prices on a large scale is the stuff of “thriller fiction” novels not real world economics …
Gov’ment intervention
Near the end of the “econ 101” textbook you might get a chapter on the pros and cons of “government intervention” in the marketplace. The U.S. Federal Reserve and “central banks” in general probably get mentioned …
From a “theory” point of view a gov’ment should be able to easily influence things like inflation and employment – in THEORY.
Limits on “real time market information” are the existential problem. It just isn’t possible to know EVERYTHING about a large, far flung, economy.
Gov’ment also tends to be “reactive” – i.e. something bad happens, everyone says “there should be a law to prevent that from happening!” Then by the time a law gets passed attempting to deal with “issue” things have changed and the law is pointless and ineffective.
The MOST effective thing “large bureaucracy” can do to “help” the economy (in general) is “stay out of the way.” Encourage research and reward innovation – don’t try to pick “winners” or push a pet agenda.
Of course the government should be involved in the “economy” but that role should be “regulator”/referee NOT “market maker”/head coach.
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