Tuesday, May 12, 2015

In Microeconomics how does shortage affect product pricing?

This is one of the best essential economic questions, but the response in fact has some interesting nuances, so it's not reasonably as uncomplicated as it seems. Usually, though, the "supply and demand" theory states that both as the supply for a product enhances, the price reduces, and as the demand augments, the price increases.

Demand is the further side of this equation worth bearing in mind, and usually the more demand there is for something, the greater its price. Gas is an impressive example of this: if each one just bought 10% less gasoline, the cost of gasoline would drop. Art is again an instance of this too, and as an artist turns into more famous their works can radically increase in value. Certainly, that's one reason why some believe that investing in "unknown" artists is huge way to make money in the long term.

The wrinkle with all of this is the concern of commoditization. When a product turns into a commodity, then there's fundamentally infinite supply and the cost of production actually becomes irrelevant to the cost it can command in the marketplace. Personal computers are the just right example of this and it's proven an unusual challenge for companies similar to Dell (Nasdaq: DELL) and Gateway (NYSE: GTW) as they've seen their whole business model crumble. Computers can be so inexpensively produced and built that they end up differentiating on weird things similar to the color of the case since each machine has the same hard drive, same CPU, same memory, and same plugs and capabilities.

Nevertheless, long answer to a short question. Innermost "well behaved" markets, the cost of a product goes up noticeably when it's been pushed by both its scarcity and demand.
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