Monday, August 25, 2008

A Mini-Treatise on Price

Those who teach economics know that there's more to it than just supply and demand. It's a place to start, but it frequently is not the whole story.

This article from the Economist does a pretty thorough job of explaining the ins and outs of pricing in the current economic environment. Basic theory says "demand is dropping, so drop prices." But how far can they be dropped? We can look at marginal cost as limiting factor. (But there's always that old joke about selling for less than cost and making it up on volume.) But one should also consider elasticity of demand. How much will consumers react to a change in price?

And what if input costs are rising? That may mean a price increase would be more appropriate. But is that inflationary? And how do consumer expectations fit into the problem? If consumers are used to prices holding or dropping, they may not be willing to pay more, particularly if demand for the good or service is elastic.

The article talks about the problems facing many firms and different ways they are approaching those issues. It's an overall good example of how many aspects of economic understanding come together in a very real way when approaching what many consider to be a simple part of economic activity. (HT to regular commenter Julia for the idea.)

I look forward to your comments. (Yours too, Julia.)

2 comments:

rdan said...

Off topic:

Blog Talk Radio

Billy Halliwell has started new live broadcasts for millenium generation...might be worth a look.
He is pro-McCain, but his his counter and teammate is pro-Obama from MTV.

Angry Bear tends to the Obama camp on economics (Furman, Goolsby are the top economists on his team), but there is are differences we have with them too. Lots to discuss about handling today's issues and not a firm notion of what is correct from anyone. Economics does not provide the answers, but does help with a best guess.

Mike Fladlien said...

i think most workers are paid a wage higher than their marginal product...this economy is a long way for weeding out inefficiencies...the housing market is a good example of the market correcting and converging towards equilibrium...