Economics 101

 To look at all the moving parts in an economy, one way is to take a look from 10,000 feet.  This way we see everything.  Unfortunately, this view does not always allow us to come up with workable solutions to problems, as we can get lost in all the permutations. So let's stop and look at things from a different point of view - the beginning.

We start with a simple supply and demand chart. At any time, Consumers have so much money to spend.  At the same time, Producers have made a product that they wish to sell.  There is initially a negotiation as to the price the Consumer is willing to pay and the Producer is willing to sell at.  So far so good.  

Now we introduce multiple Consumers and multiple Producers.  Eventually, the price will stabilize on what the Consumers are willing to pay and that will force the Producers to sell at that price.  In a stable market, the Producers will work on their productivity to be able to make a profit at that price.  If they cannot, then they might leave the production of that item.  If the other producers can keep making the product at an increased volume, then the price is stable.  If they cannot meet the demand, then the shortage of items will cause the price to increase, as there will be more competition from the Consumers for the fixed quantity of items.  This may cause some Producers to either start or come back in to the market.   Eventually the system will balance out again as demand and supply find their balance.

Now, what if we add an external factor to the equation?  An example is the Government could increase the Producer's cost, by mandating working conditions or manufacturing conditions, such as environmental rules. This will skew the cost up and if it is a product the Consumer must have (food, gasoline, clothing, etc.) the price will rise.  Of course if the price rises too high or too fast, the Consumer may look for alternatives, like keep a  car longer, mending clothes,  or maybe starting their own garden.  Eventually, the price will stabilize again.

Or the Consumer, for whatever reason, decides they MUST have a product.  Think cell phones, Beanie Babies, or Starbucks coffee.  Then their increased demand will also push prices up.  But some of these increases in demand are only temporary - and the price will eventually stabilize.

Of course, the opposite can happen also.  If a product can be made less expensively, the price charged could go down and hopefully the lost profit will be made up by higher volume.  If a Consumer is no longer willing to pay a price for an item, the quality Producers may leave the market to the lower quality Producers.  If the Consumer is satisfied with the inferior product, then the situation will stabilize at the lower price.  The only way the quality of a product will increase is if the Consumer is willing to pay for it (see Mercedes Benz, Rolex watch, or Sirloin steak).

The Government can mandate features, and it can mandate a minimum quality (see food regulations, car standards etc.)  but Producers will just make products to the minimum standards, unless the Consumer is willing to pay more.  

So far we looked at the relationship between the Consumer/Producer and the Government.  Next time we will throw in some other ways the supply/demand chart can be disrupted.