A great economics article appeared yesterday over at Mises.org that every young person should check out. The brilliantly titled piece, "I Just Got Price-Gouged and I'm Still Smiling" is about how prices fluctuate based on consumer demand in varying situations. When resources are limited (as all resources are), it's impossible to have enough information to determine a sense of ultimate value. Therefore, the pricing mechanism serves to tell us what is available at that time and place and lets the consumer decide to what extent he/she wants or needs that product. When prices go up, we are receiving information about that resource--that supplies are getting low or demand is increasing. When prices go down, the inverse set of information is usually true. We then decide how much we would like to spend or invest based on those circumstances. If I'm desperate, I might pay more. If I can do without, my lack of purchase allows someone else the opportunity to buy that they wouldn't otherwise have had. This is how prices work.
Sometimes, we may feel that producers (retailers or whoever is selling something) are charging too much for a particular item. Our assumption that it's "too much" shows our incomplete information regarding the availability of the resource. We can complain all we want, but it doesn't change the reality that resources are limited and can only be distributed efficiently is prices are able to adjust. (Among MANY other reasons, this pricing problem is essentially why socialism can never be a legitimate economic system.)
The author of the article gives an excellent example of how an umbrella vendor charges more during a rainstorm on the streets of New York. It appears as if he is taking advantage of walkers who don't want to get wet by hiking up his price. However upset this may make us, economic logic tells us this is exactly what he should do. It makes perfect sense based on the availability of the given resource, in this case the number of umbrellas he has to sell.
Only the retailer and the consumer can make the decision on what the price can be and if a purchase will be made. They are the only ones with a clear sense of their own marginal utility. A third party should never be involved as it distorts the economic transaction because of the inherent lack of information the additional party is working with. This is why free people making their own decisions on what they want and what they are willing to spend is the only way to distribute resources efficiently. When a third party gets involved (usually government), prices tend to either skyrocket because of administrative bloat or supplies vanish because of inefficient allocation. The people who truly want or need that particular resource are usually harmed, while those with endless money or political connections (those least affected by market volatility) are the only ones who can benefit.
The article does a great job of taking a fairly complex idea and demonstrating its easy-to-understand applicability in the real world. For those out there seeking extra credit, check out Nobel Prize-winning economist F.A. Hayek's famous essay, "The Use of Knowledge in Society," for more info.
Sometimes, we may feel that producers (retailers or whoever is selling something) are charging too much for a particular item. Our assumption that it's "too much" shows our incomplete information regarding the availability of the resource. We can complain all we want, but it doesn't change the reality that resources are limited and can only be distributed efficiently is prices are able to adjust. (Among MANY other reasons, this pricing problem is essentially why socialism can never be a legitimate economic system.)
The author of the article gives an excellent example of how an umbrella vendor charges more during a rainstorm on the streets of New York. It appears as if he is taking advantage of walkers who don't want to get wet by hiking up his price. However upset this may make us, economic logic tells us this is exactly what he should do. It makes perfect sense based on the availability of the given resource, in this case the number of umbrellas he has to sell.
Only the retailer and the consumer can make the decision on what the price can be and if a purchase will be made. They are the only ones with a clear sense of their own marginal utility. A third party should never be involved as it distorts the economic transaction because of the inherent lack of information the additional party is working with. This is why free people making their own decisions on what they want and what they are willing to spend is the only way to distribute resources efficiently. When a third party gets involved (usually government), prices tend to either skyrocket because of administrative bloat or supplies vanish because of inefficient allocation. The people who truly want or need that particular resource are usually harmed, while those with endless money or political connections (those least affected by market volatility) are the only ones who can benefit.
The article does a great job of taking a fairly complex idea and demonstrating its easy-to-understand applicability in the real world. For those out there seeking extra credit, check out Nobel Prize-winning economist F.A. Hayek's famous essay, "The Use of Knowledge in Society," for more info.