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Thu, Dec. 20th, 2012, 07:28 pm
Economics 101: the price spikes.

Originally published at VolkStudio Blog. You can comment here or there.

Imagine a store with ten rifles in stock, average wholesale price $500, retail $600. One sells per week, on average. What should the store do when the customers buy five rifles in a day?

They would want to re-stock immediately or risk running out by the next night. Only they can’t re-stock at once due to delivery times, so they might up the prices to $700 to reduce the sales and still have inventory by the time new stock arrives. They may find out that the manufacturer of rifles now charges $700 wholesale — so the first five rifles sold at $600 didn’t even bring enough money to re-order fresh stock!

The factory has similar problems. Springs, barrels, magazines, sights and other parts have jumped in price, but the factory still owes deliveries contracted earlier at lower prices. The factory costs — not just parts but also staff overtime — just went up. They have to scramble to keep up.

In a situation like the current rush, the manufacturers cannot expand production much because the demand will drop off eventually, either because their products become illegal or because the threat of restrictions abates. So they have to make do with limited staff and equipment, with rising cost of parts and supplies. If they don’t keep up, they lose market share. If they regulate the demand by adjusting wholesale prices, they may alienate some dealers. The same is true for the retail stores, some people will object to the so-called “price gouging”, a Communist term if I ever heard one.

Without cash flow to keep the entire very long chain of production going, we’d have shortages. What would you rather have, rifles available at $700 or unavailable at $500? And the same question applies to ammo, gasoline and other scarce goods. A person with five rifles in the safe will balk at the higher price tags, a person who has none might spend the extra $200 and become armed. Thus those in more dire need get what they need — through the magic of “price gouging” also known as free market.

This process self-regulates. Raising the price too much loses market share, but people should be free to ask whatever they please. After all, they own the goods in question and it’s their right to part with them or withhold from sale. Instead of selling gasoline at higher price to passing strangers, a gas station owner may choose to close shop and give away the product to friends and neighbors, gaining more in good will and favors owed than he would in cash under a price control regime. The motorists fleeing natural disasters or merely passing through would run dry and really be in trouble. Had they been able to offer a more realistic price for the suddenly scarce gas, they would have had a choice of taking the offer or leaving it. Under price controls, the choice is gone. Forcing the sale at the point of government bayonets simply ruins the business slightly slower as the funds for re-stocking the next day’s goods would be lacking. This pattern has been tried world wide and brought us such “prosperous” countries as North Korea and Cuba. Let’s not try it again int he US. It didn’t work in 1971-73 and won’t work now.

Fri, Dec. 21st, 2012 02:27 am (UTC)

And of course, at the new price, the fellow with five in the safe might decide he only needs four...