How Economics Roll

If you hate something, just give it a bad name, and you can probably get others to hate it, too.

A good example of this, especially relevant in times like these,* is “price gouging,” describing the practice of raising prices on products when demand increases. This is perceived to be an evil thing, the act of greedy profiteers, exploiting the needs of consumers for personal gain. (Never mind that that is exactly what each one of us is doing every time we exchange our time, labor, possessions, or money for another person’s time, labor, possessions, or money.) People need stuff, and raising prices makes it more difficult for them to acquire them. Price increases only hurt buyers, and benefit greedy sellers.

But that is an entirely emotional reaction that fails to account for facts.

When demand for a product increases, stores will stock more of it. That can’t happen instantly, though, especially when the increased demand is high and unexpected, as happens when crises provoke panic-buying.† Orders have to be made and filled, and supplies have to be trucked to the stores and stocked on shelves. If the increase is great enough, factories have to ramp up production. All of this takes time and money. Although increased volume eventually lowers prices, the initial adjustment costs more. Consequently, prices necessarily increase. At the same time, supplies dwindle, fueling the panic, increasing the demand, shortening the supply, fueling the panic, increasing the demand . . .

If only something could be done!

Well . . .

Say my toilet paper budget is $10. Toilet paper is $1/roll. I only need seven rolls, but I’m panic-buying, so I spend the whole $10 to get ten rolls. Everyone else does the same, some because they are also panic-buyers, and others because they want to get theirs before the panic-buyers deplete the supply. Thus, the supply is wiped out, and no one, no matter how flush with cash, can get toilet paper. And that stinks.

Now, suppose the TP Emporium raises the price to $2/roll. “Outrageous!” I fume, and stomp home with my five rolls, which is fewer than I needed, but better than nothing. Other consumers follow suit, and all are equally angry.

All but one, that is. That one is the economist who comes in later in the day. By this time, the price has been raised to $3/roll. He doesn’t like it, but pays willingly, even gratefully, because he understands that price is the only reason there is any toilet paper left on the shelf at all. Raising prices slows demand, widening the distribution of supplies, while allowing production, transportation, and myriad other factors to catch up.

These are difficult facts, more so for some than others, but facts they are, and reacting emotionally against them or sinfully impugning the motives (1 Corinthians 4:15) of merchants helps no one. Though this process may be painful for many, it does, in fact, benefit everyone.

And that’s the bottom line.

* Written during the coronavirus pandemic of 2020.

† It seems the Great TP Shortage of 2020 was not caused by panic-buying and hoarding, but by a change in market demand, resulting in a, as the experts call it, discombobulation of the production and supply chain. Read more about that here. This fact notwithstanding, the lesson of this post remains, regardless of the cause of the shortage.