18 February 2025 at 12.17.23 PM

Introduction to Supply and Demand

• Explanation of Supply and Demand curves in economics.

  • Supply curve typically drawn at a 45-degree angle upward.

  • Demand curve intersects the supply curve to establish market equilibrium.

  • Supply and demand dictate market price based on consumer interest and supplier response.

Market Equilibrium

• Equilibrium point: where demand and supply meet, establishing market price.

• Increase in Demand: Causes the demand curve to shift right, leading to a higher equilibrium price.

  • Example: A new product (e.g., a $500 T-shirt) could represent a significant increase in demand.

Price Mechanism

• When demand outstrips supply, the price signals suppliers to increase production.

  • Higher prices signal suppliers to allocate resources effectively.

• Consumer behavior: When prices rise, some buyers may choose not to purchase, balancing demand with available supply.

Seasonal Demand Shifts

• Example: Increased flower demand around February 14 leads to higher prices.

• Suppliers might not recognize increased demand until stock runs low or until price signals indicate demand.

Price Gouging vs. Free Market Mechanics

• Price Gouging: A term often used to describe high prices during emergencies.

• Moral questions arise around whether sellers should disclose market knowledge or charge what buyers are willing to pay.

• Historical perspective: Cicero and Aquinas debate price gouging in extreme scenarios such as famine.

Market Responses and Chaos from Price Controls

• Price controls: Implemented to stabilize prices but can lead to shortages and chaos.

  • Example: Price controls during disasters can prevent prices from rising, leading to scarcity.

• Consequences of price controls:

  • Misallocation of resources.

  • Creation of black markets as sellers find ways to bypass regulations.

Inflation and Economic Signals

• More money in circulation vs. fixed product supply leads to inflated prices.

• Inflation: Occurs when the money supply increases without a corresponding increase in goods.

  • Example: If candy bar prices rise due to excess money without increase in supply, inflation occurs.

The Role of Government in Price Controls

• Government interventions can disrupt natural market signals.

  • Efforts to control rent, wages, and prices often result in unintended negative consequences.

• Historical context: Nazi Germany's monetary policies and their failure to stabilize the economy through price controls

  • Resulted in printed money leading to inflation without increased production.

Conclusion

• Key takeaway: In a free market, prices are signals guiding buyer and seller decisions.

• Failure to allow prices to fluctuate with supply and demand can lead to economic inefficiency and chaos.

• The complexity of human decision-making can't be replicated through centralized control.