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Real prices can be about more than supply and demand
How to turn an unfair price rise into a fair one
This last week, the UK has been experiencing a freak petrol* crisis. A handful of filling stations on the south coast had run out of fuel because of minor supply issues. The news led to a vicious circle of spreading panic buying, dozens more stations running dry, even more panic buying with demand up to 5 times its normal level, and so on. Why did such a demand-supply imbalance not push prices up?
The law of supply and demand in economics is much like the laws of thermodynamics in physics: it describes a natural phenomenon. The market price of a good is largely determined by how much there is on offer (the supply) and how much is required (the demand). Whatever its price is right now, if there is more than needed (i.e., supply exceeds demand), it will come down. Some suppliers want to get rid of their surplus, which they need to offer more cheaply in order to attract more buyers, and this raises demand. The price reduction may also lead to some producers halting production, thus reducing supply. Once supply and demand are matched, the price stops moving: every unit produced is sold, and every unit demanded is fulfilled — “the price is market clearing “, economists say.
