The Expert Podcast

# Has the Law of Supply and Demand Been Repealed?

So is the law of supply and demand been repealed? As you know, the law of supply and demand is a cliche. It's been used for decades and it basically says that when supply goes up the prices come down, when demand goes up prices go up. So the more people want to buy stuff the prices will go up and the more inventories available for sale supply goes up it brings prices down because there's more competition in the market. That's kind of what drives the stock market right when a bunch of people want to get into the stock market and buy stocks they go up, when not as many people go into the stock market the prices go down. If there's a flood or glut of inventory then sellers will discount it to move it out clear it out. You see sales well excess inventory sale at the furniture store at the car dealership and prices go down right? That's supply and demand.

But does that still work? Does that still apply? There is excess supply in some industries and prices are still going up. There is for example in real estate suddenly there's more inventory coming into the market and prices have not gone down, they're still going up maybe not as fast as they did but they're not going up. At the same time you might think that demand should go down because interest rates are higher. Look, interest rates were two and a half percent six months ago, now they're five and a half percent. That's going to take away some demand. Even if the same number of people want to buy a house some of them can't now because their payment is going to be too high because of interest the demand is still there.

Supply and demand only works if prices are allowed to freely float. The problem is for many types of goods and services prices can't freely float because of labor cost, because of supply chain issues and maybe that's a supply issue, but also because of price controls. There's already been talk about putting price controls on certain things. There's rent controls in certain parts of the country, there's fuel controls, there's laws that says if you gouge somebody on pricing as a company you can get penalized. Well what's gouging right? If your costs go up or if you don't have enough inventory to sell and you raise your price are you at risk of being prosecuted for price gouging right?

Car dealerships have much lower demand than they used to because people don't want to buy new cars as much. However many dealerships many manufacturers still have a price markup on their window sticker 500, 2000, 1500 additional above sticker price on the car. How can they do that? Well in some ways you have to do that even though you have less demand. If you don't have the ability to sell as many cars you might have to make more on each car to pay your overhead. If you have a large building a big parking lot a lot of employees huge overhead that doesn't change just because you sell less cars. Your landlord needs the same amount of money for your parking lot, your employees still need to get paid, you still pay taxes, you still pay insurance that doesn't go away. So if you sell 300 cars you divide up your profit over 300 cars but now if you're only selling 80 cars you have to divide that profit divided by 80 so you have to make more profit per car and that's just one example.

The same holds true for building houses. If a builder can only build three houses a year versus 10 they have to divide up their expenses over those 10 houses, their fixed expense their insurance their bonds their equipment their office. What about something smaller? What if you're a candy shop and you sell less candy? Well you still have to pay your rent your taxes your employees your advertising. If you sell less candy you might have to sell a candy bar for three dollars instead of two dollars and 50 cents. That affects inflation. That's not necessarily supply and demand. Sometimes less demand will end up with a higher price because the merchant the seller the manufacturer needs to still have the same amount of income to pay their basic bills and they have to divide it up over less demand.

That's why sometimes you see a lower volume. Look, there's less people that want to buy a rolls royce than want to buy a toyota. Less demand for a rolls royce partially because of the price but partially because not everybody wants that kind of car so the price has to be higher to support all that manufacturing on a lower volume. If you are a service company let's say if you electric electrician repair company you might think well less people doing things means that the electricians will be lowering their rates. Well they can't because they can't get labor to do the work. You can't get apprentices you can't get employees. Even things like state parks we're seeing articles where they're having to shut down beaches because there's not enough lifeguards right?

Supply and demand only works if all the other parts of the economy are free-flowing and loose pricing labor availability supply chains. If all those things are easily accessible and free-flowing supply and demand works. As soon as you take two or three of those factors and bottle them up or lock them up or restrict them supply and demand does not work.

Back in soviet russia there used to be limits on prices but that meant that grocery stores were empty because if you can't sell loaf or bread for what it takes to make a profit on it you just don't sell bread so there was rationing. There was an old joke about a guy who bought a uh vehicle from a car dealer in russia and the and the dealer said well it's going to take two years for you to get your car and they said it's going to be ready on october 12th your car will be ready and the buyer said well what time on october 12th and the car dealer says well why does it matter what time? He says well because the guy delivering my refrigerator is coming in the morning. The joke is obviously that everything took two years to get when the economy was stifled or not at that point.

But when you have limitations on the economy where you have either government intervention regulation supply chain restrictions it's going to create more of those instances where supply and demand is not the natural law of the land anymore. Let us know what you think in the comments. Do you agree with this? It's not a hundred percent of a repealed law supply and demand still works a little bit but it's not a direct effect on pricing anymore as it used to be.