Why do prices go up

The term "inferior good" does not mean they are of low quality. There is an inverse relationship between income and demand. Examples of inferior goods might include used clothing, potatoes, rice, maybe generic foods.

If you lose your job so your income decreases you may shop for clothes at the Salvation Army Thrift Store demand for used clothing increases.

What is a normal good for one consumer might be an inferior good for another. For example, if the income of one family increases they may buy a second small car a normal good , but for another family, an increase in income may mean that they don't buy a small car an inferior good anymore and they buy a mini van instead.

Npot D Npot D. Often economists say that an increase in the "number of consumers" will increase demand. But, if K-Mart has a sale on Pepsi price of Pepsi decreases what happens to the number of consumers buying Pepsi? It will increase. The law of demand says that if price goes down, quantity demanded goes up. So, if they have more customers because the price went down, what happens to demand? Nothing - price does not change the demand schedule. T -- tastes and preferences.

Supply is more difficult for students to understand than demand. We are all consumers demanders , but few of us own a business suppliers. So, remember to think of yourself as a business owner when we discuss supply. Supply is a schedule which shows the various quantities businesses are willing and able to offer for sale at various prices in a given time period, ceteris paribus.

Supply is NOT the quantity available for sale. This is the way the term is often used in the popular press. Supply is the whole schedule with many prices and many quantities.

Just like with demand, there is a difference between a change in quantity supplied and a change in supply itself. So, if the price increases what happens to supply? Price does not change supply, it changes quantity supplied, because supply means the whole schedule with various prices and various quantities. If we plot these points remember any point on a graph simply represents two numbers We get the graph below. If we assume there are quantities and prices in-between those on the schedule we get a supply curve.

The law of supply states that there is a direct relationship between price and quantity supplied. In other words, when the price increases the quantity supplied also increases. This is represented by an upward sloping line from left to right. Why is the law of supply true? Why is the supply curve upward sloping? Why will businesses supply more pizzas only id the price is higher? I think it is just common sense.

If you want the pizza places to work harder and longer and produce more pizzas, you have to pay them more, per pizza. But economists, as social science, want to explain common sense. We know businesses behave this way, but why? There are two explanations for the law of supply and both have to do with increasing costs. Businesses require a higher price per pizza to produce more pizzas because they have higher costs per pizza.

First, there are increasing costs because of the law of increasing costs. In a previous lecture we explained that the production possibilities curve is concave to the origin because of the law of increasing costs. Let's say a pizza place is just opening. The owner figures that they will need five employees.

After putting an ad in the paper there are twenty applicants. Five have had experience working in a pizza place before. They came to the interview clean and on time. The other fifteen had no work experience. Many came late. A few were caught steeling pepperoni on the way out. One spilled flour all over the floor. Which applicants will be hired? Of course it will be the five with experience and the other fifteen will be rejected because they would be too costly to hire.

NOW, if the pizza place wants to produce more pizzas they will need more workers. This means they will have to hire some of those who were rejected because they were more costly less experienced, etc. So, they will only hire the more costly employees if they can get a higher price to cover the higher costs. Second, there are increasing costs because some resources are fixed. This should not make sense to you. Why would there be increasing costs if we use the same quantity of some resource?

Well, let's say that the size of the kitchen and the number of ovens capital resources are fixed. This means that they don't change. Now, if we want to produce more pizzas you will have to cram more workers into the same size kitchen. As they bump into each other and wait for an oven to be free they still get paid, but the cost per pizza increases.

Therefore they will not produce more pizza unless they can get a higher price to cover these higher per unit costs. So the supply curve should be upward sloping. Market supply is the horizontal summation of the individual supply curves. Instead of looking at how many pizzas one pizza place is willing and able to produce at different prices individual supply , we keep the prices the same and add the quantities of additional pizza places.

Prices stay the same, but quantities increase because there are more pizza suppliers. So the market supply of pizzas is further to the right horizontal than the individual pizza place supply curves.

The price of the product P. But there are other determinants of how much business supply besides the price. We call these the Non-Price determinants of Supply. Change in Quantity Supplied Qs. Change in Supply S. A change in supply is a shifting the supply curve because there is a new supply schedule.

The supply curve either moves left or right horizontally since the prices stay the same and only the quantities change and quantity is on the horizontal axis. Many students want to draw the arrows perpendicular to the supply curve. That could get confusing! A change in supply is caused by a change in the non-price determinants of supply. At the same prices, the quantities supplied will be greater.

At the same prices, the quantities supplied will be smaller. Let's look at these determinants on at a time. We must know how they shift the supply curve if we are to use the supply and demand tool to understand how prices are determined in a market economy. Pe S today Pe S today. If the price of soybeans increases the supply of corn will decrease. The supply curve of corn will shift to the left as farmers plant more soybeans and less corn.

P soybeans S corn P soybeans S corn. Remember, price does not change supply, it changes the quantity supplied. The price of resources Pres , improved technology Tech , and taxes and subsidies Tax all affect supply because they change the costs of production. Pres -- price of resources. For Example: if the autoworkers unions receives a significant wage increase, this will increase the costs of producing cars and decrease the supply of cars S.

P autoworkers wages costs of producing cars S cars. Pres costs S Pres costs S. Tech --technology. If the technology did not decrease costs, then it wouldn't be used. If there is a high-tech expensive way to produce a product and a low-cost, low-tech, way to produce the same product, companies that use the low-cost methods will be able to sell the product at a lower price and beat out the high-cost producers.

Improved technology costs S. What has improved technology done to the costs of medical care? For example let's say that there is a disease where with existing low-cost technology, half the patients die. Now, if they invent a new high-cost technology that will save all lives which technology will be used?

One product is when half the patients die, the other product is when all patients live. We can't put two products on one supply curve. Let's use one more medical example. Why do doctors still use low-tech stethoscopes? Isn't here a high-tech electronic stethoscope? Yes there is, so why don't doctors use it?

Doctors will use the cheaper technology as long as the results are the same. The low-tech stethoscopes can't always pick out the fetal heart beat. The product changes. So, improved technology will decrease costs and increase supply OR it will increase costs and change the product which we cannot put on one graph.

Tax --taxes and subsidies. Let's discuss the gasoline tax. If the tax on gasoline increases will this affect the demand for gasoline or the supply of gasoline? If you said demand - then which non-price determinant of demand has changed? Taxes costs S Taxes costs S. Who pays the gasoline tax? Who pays the wages of the gas station employees? Whether you answer the consumer of the gas station owner, you have to give the same answer for both questions.

Both taxes and wages are costs to the producer or seller. Higher gasoline taxes do not shift the demand curve, but they may result in a higher price and therefore a decrease in quantity demanded.

Subsidies are the opposite of taxes. Instead of the business paying the government, the government pays the business. There are fewer subsidies than taxes. But let's say the the government wants to encourage the use of solar energy so they put a subsidy or increase one on solar energy equipment. Subsidies costs S Subsidies costs S. Nprod S Nprod S. Equilibrium means that there is no further tendency to change. When something is at equilibrium, it is at rest, not changing.

Like a pendulum. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies. That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth.

Don't equate a company's value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. To further complicate things, the price of a stock doesn't only reflect a company's current value—it also reflects the growth that investors expect in the future. The most important factor that affects the value of a company is its earnings.

Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it.

If a company never makes money, they aren't going to stay in business. Public companies are required to report their earnings four times a year once each quarter. Wall Street watches with rabid attention at these times, which are referred to as earnings seasons.

It only occurs when there is a supply shortage combined with enough demand to allow the producer to raise prices. There are several contributors to inflation on the supply side. For example, global supply chain disruptions, like the one caused by the pandemic in , can lead to cost-push inflation.

This was due in large part to ongoing supply chain issues. A company with the ability to create a monopoly is also a contributor to cost-push inflation.

It controls the entire supply of a good or service. The Sherman Anti-Trust Act outlawed monopolies in Natural disasters create temporary cost-push inflation by damaging production facilities. That's what happened to oil refineries after Hurricane Katrina. The depletion of natural resources is a growing cause of cost-push inflation. For example, overfishing has reduced the supply of seafood and drives up prices. Government regulation and taxation can also reduce supplies.

For instance, in , U. That created shortages in manufactured parts, with some producers raising prices. In , meanwhile, subsidies to produce corn ethanol reduced the amount of corn available for food.

This shortage created food price inflation. When a country lowers its currency's exchange rates, it can create cost-push inflation in imports. That makes foreign goods more expensive compared to locally produced goods. Federal Reserve Bank of St. Board of Governors of the Federal Reserve System. Is It Important? Congressional Research Service.

Economy: Inflation. Michigan Senate. Bureau of Labor Statistics. Housing Bubble and Bust: Impacts on Employment. Committee for a Responsible Federal Budget. Federal Reserve Bank of San Francisco. World Wildlife Federation. GDP Gets a Trim. Department of Agriculture. Accessed Nov. Actively scan device characteristics for identification. Use precise geolocation data.

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