Economics 101: the price spikes.

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.

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15 Responses to Economics 101: the price spikes.

  1. Price gouging is a Christian concept, codified by Aquinas.

    • Oleg Volk says:

      Good to know. Looks like he was as ignorant of economics as Marx.

      • Price gouging is a normative concept that cannot be refuted by economic arguments.
        http://en.wikipedia.org/wiki/Just_price

        • Totenglocke says:

          Raising prices due to increased demand isn’t “price gouging”, it’s the only way that you prevent shortages. That’s why when say the supply of oil drops rapidly and a government (such as our own in the 70’s) refuses to let companies raise prices to reflect the lower supply compared to demand – what happens? That’s right, shortages (which is why we had the long lines at gas stations in the 70’s).

          Take Economics 101 (or just buy a Intro to Economics textbook) and you’ll learn very quickly why your argument is incorrect.

        • Oleg Volk says:

          Just like many 850 year old religious theories, this one has little to do with reality. I am not sure why it’s given much credence.

          • Paul Koning says:

            Indeed, it has nothing to do with reality. Just another dangerous socialist notion. Best case it will simply benefit some favored parties, those with the right kind of political pull.
            Ludwig von Mises did a nice job of picking apart that fallacy (“Human Action”, the section aptly entitled “The Hampered Market Economy”).

          • Reality is a factual matter, whereas just price is a matter of value. Unless you claim a religious revelation connecting the latter to the former, you better make a very good argument to the same effect. Give my warmest regards to Plato while you’re at it.

  2. Zach says:

    I don’t care if the phrase “price gouging” is communist; any self-serving piece of scum who charges 300% or more of market price for an item just ’cause DESERVES to go out of business, and I wish all the capitalist ill on CTD that I can. I will never, EVER do business with those craven cowards. Period dot.

    • Paul Koning says:

      Someone who charges 300% of market price will certainly go out of business.
      On the other hand, if they charge 300% of what you would like them to charge, and they do *not* go out of business, that meant the market price is actually a lot higher than what you wanted to pay. There’s no problem with that; it simply means that the market right now doesn’t support your buying preferences. Maybe next month it will. Or maybe next month your willingness to pay the higher price will have changed.

  3. Sam says:

    Price is the best way to communicate value, and the best way to allocate scarce goods or services. “gouging” is victimspeak. It means I don’t like the price. In Oleg’s example, I’ll walk in and buy all five rifles and no one else gets one. At a higher price, I’ll buy what I need and there will be four left when you walk in. If the transaction is voluntary, gouging cannot exist. Unless the transaction is mandatory under threat of force. Remember… Not everything you don’t like or don’t understand is bad.

    • Pat Udenberg says:

      Amen to that.

    • LarryArnold says:

      Price is the best way to communicate value, and the best way to allocate scarce goods or services.

      It’s also the best way to communicate value and encourage the production of more goods and services. If the value of firearms rises more people will start manufacturing them. Which is exactly what has been happening with sporting rifles. They aren’t all Colt any more.

      • To elaborate on what I pointed out above, there is no known way of inferring values from factual matters such as market prices. Even if economics qualified as a science despite its want of predictive accuracy, nothing within its scientific scope could warrant such inferences.

  4. Obviously some Satanists on here…I, for one, may Associate My Person with a Christian sentiment, with catholic tastes.

    This ‘economics’ you all speak of

    Is nothing but Black Magic.

    Maybe if you all would ACCEPT CHANGE and stop trying to FREEZE momentum so that you can FOREVER seal your mind from challenges, maybe then you would just realize that

    People will pay what they need to get what they want.

    There is no moral aspect of setting prices.

    You buy it, or you don’t.

    Satanists….the Universe does NOT exist to fulfill YOUR whims.

    Because YOUR whims end up cancelling themselves out.

    Even if you are left with ‘material possessions’, your soul has been raped, and you are left with nothing but your Constant Fear of Your Lord Ba’al.

    I used to think It was cool too…

    But I grew up, or Inwards, rather.

  5. Rivrdog says:

    I do not mind gun dealers adjusting their prices to keep a constant profit margin, but tell me, Oleg, how are we to know the honest price adjustments from the out-and-out piracy?

    The answer obviously is inform the customer base.

    This has not been done, and I suspect it won’t be done, so the pirates are hiding behind the those who are not pirates. Answer: don’t deal with anyone who uses “code” for piracy. When that dealer puts out a long, flowery statement with zero data in it, take your business elsewhere.

    This is the proximate result of procrastination. My blog and others have been warning of this crunch for months, we warned just what commodities would be in short supply, so it’s not like this should have taken anyone by surprise.

    Since the Speaker of the US House of Representatives will soon be a more staunch conservative, there will be no “Assault Weapons Bill” forthcoming from the Feds. Only Executive Orders and FBATFE regulation changes will impact us. State leges are another matter though, and since most state legislation can be enacted with emergency clauses upon a Governor’s signature, these restrictions can sneak up on us quickly.

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