Why Do Prices Rise?

You’ve probably heard your parents complain about the price of gas going up, or how expensive milk is becoming, or about rent and tuition fees and all those other grown-up things. Economics also explains why prices go up, and most importantly, it explains how they go up.

Review: Supply and Demand

Since the supply and demand graphs are part of every basic economics concept, let us go back to them and review how they change prices. Remember: the higher the supply, the lower the price. The higher the demand, the higher the price. Both the suppliers and the demanders need to agree on a price, the “equilibrium price,” that they are happy with.

The more suppliers there are of a certain good, like a school backpack, the lower the price will be. This is because the suppliers want you to buy their backpacks, and they know you will go to those with lower prices. Since they are competing with each other, their prices will stay as low as possible.

The more demanders (that’s you) there are of the school backpack, the higher the price will be. This is because you are competing with each other. To narrow down the number of demanders, the suppliers will raise prices until the number of school backpacks they are selling matches the number of demanders who can afford them.

Why Do Prices Rise?

What we want to know now is what makes suppliers and demanders look at things as precious (think the One Ring) or needed. For example, when would school backpacks be most in demand and supply at the same time? Usually, at the beginning of the school year. Both suppliers and demanders know that school backpacks are needed at exactly that time.

Now, we will go through the different reasons why prices go up. This usually happens when there is a sudden rise in demand for something that is low in supply.

Fashions And Trends Make Prices Go Up

The funniest things that makes demand go up for certain goods is the fashion or trend of something. For example, there are many fans of the U.K. boy band One Direction. Because of this, One Direction concert tickets are very expensive, and their merchandise–goods like notebooks, mugs, and pillows with their faces on them–is also very expensive.

The more fans there are of a band, or a movie, or a certain brand of shoes, the more it is worth, the more demanders will pay for it, and the higher the prices will rise.

Seasons Make Prices Go Up

The best example of seasons is the turn of the school year. For example, if there was only one school supply store in your city, and one department store, the prices of pad paper and pencils would be very high at the start of the school year. The same with school backpacks and shoes. However, in the middle of the school year, the prices will be lower, because your demand is lower.

Seasons also apply to food, especially fruits. If you buy a fruit that is not in season at the moment, it will be more expensive because it might have been imported, and because demand is high. When the fruit is in season, the price will be lower.

The Risk Of Accidents Makes Prices Go Up

Unfortunately, the higher the risk of a certain accident is, the more expensive it is to prevent that accident. This is because demand for the goods that will prevent those accidents is also high. For example, studies from those on sites like Infant Life Jacket state that “1 out of 5 children died from drowning,” which is really high.

Pretend that there is only one supplier of child and infant life jackets in your state. Because the drowning rate is so high among children, the demand for child and infant life vests will be very high, and the price will go up. If, for example, 1 in 10 or 1 in 1,000 children died from drowning instead of 1 in 5, the price of life jackets would be lower.

Natural Disasters Make Prices Go Up

Natural disasters are events like hurricanes, typhoons, earthquakes, droughts (lack of water), that happen without humans directly causing them. These disasters usually lower some essential supplies. For example, in time of flood, drinking water will become very expensive–it is very hard to find drinking water in a flooded-out place.

If there is a drought, on the other hand, it will be hard for grain and vegetables to grow. Bread will become very expensive, as will carrots and potatoes and other plants that need a lot of water. If a hurricane blows roofs off many houses, roofing tiles will become expensive, because demand is high while supply is low.

What Does That Mean For Me?

Understanding why and how prices rise help you, the demander, to know when things will get very expensive. For example, you might want to buy your new school backpack in the middle of summer or the end of the school year, so that the prices are still low. You can already predict that you need to save for the next One Direction concert, because their many fans keep the tickets expensive. Knowing why prices rise helps you to allocate your resources more efficiently, and practice good economics.

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