Question

1. Rice prices normally rise after a typhoon destroys some of the country's prime rice growing land. A "street talk" feature on a TV show sought people's reaction to higher rice prices. Here is a typical response: "I don't like higher rice prices. I think the rice sell- ers just use the typhoon as an excuse to raise prices." How does this point of view differ from that of economists who use the model of demand and supply to explain price changes? Il do

Answer 1

A supply curve shows how amount supplied will change as the price level rises & falls, presuming ceteris paribus—no other economically pertinent factors are changing. If other determinants pertinent to supply do fluctuate, then the whole supply curve will move. A shift in supply implies a change in the amount supplied at every level of price. A typhoon lessens the supply of agricultural items, which implies that at any particular price, a lesser amount will be supplied.

Economists normally lobby against executing price-gouging regulations which limit large price escalations during natural disasters. Instead, they support increasing prices so as to bring demand levels in line with supply. By permitting the market to function, economists say, products will be available & sold to those only who value them the most. High prices also lessen hoarding — consumers purchase only what they require instead of making ‘It is cheap, so let us procure a few extra’ purchases. Just as essential, a greater profit potential incentivizes firms to procure proactively additional supply to fulfill demand. The stark downside is that this strategy unfairly discriminates against lower-income persons, who are less able to afford greater prices.

In contrast, several policy makers believe that price levels should be maintained / augmented only slightly (for example, by 10per cent) during disaster circumstances. They view this as an egalitarian, 1^st -come-1^st -served methodology to allocate scarce products. Drawbacks of restraining market prices include the inverse of the advantages above- quick sell-outs, hoarding, & lowering down the financial carrot to foster supply.