Looks like a shortage to me!

It is common for businesses to use price competition and / or “loss leaders” to attract customers who will then (hopefully) also buy other items that are priced more profitably. But scenes from the traditional “Black Friday” sales in the USA got me thinking about how we use supply and demand analysis to show lower prices - and I think I have settled on two different models.

When a business engages in traditional price competition, it must be prepared to accept a lower per unit profit on each item - which economists would describe as part of the built in opportunity cost of providing the good or service. Therefore, the economic cost of production falls and the supply curve shifts to the right - a movement along the demand curve. The equilibrium price and quantity are still achieved.

However, there are other situations where this does not seem to apply. This video show customers in the USA fighting over $2 waffle makers and this one shows $1.28 bath towels at Wal-Mart. The extra low prices attract a lot of extra demand but the difference is that the firm is not expanding supply (and therefore reducing its built in opportunity costs). It can therefore only be described as a shortage.

And speaking of supply and demand, this Carpe Diem post is a great little discussion of the links between the macro and micro economies. Of course, if the head of the Venezuelan price control agency is correct and “the law of supply and demand is a lie” then we need to revisit our basic theory! My previous post on pricing in Venezuela may also be of interest!