It has become quite popular to fret about empty shelves in supermarkets or to criticize individuals for selling bottles of hand sanitizer online for multiples of the normal price. However what seems like the beginning of the end is really no more than the regular functioning of markets. While some may see this as proof that markets need to be controlled, by understanding the function of prices in a market it is possible to understand why during times of crisis it is especially important for markets to be allowed to function unimpeded.
During times of crisis the most important economic fact that must be remembered is prices in markets act as signals and convey information. When prices increase consumers are being told to limit their use of the product in question, and suppliers are told to increase the amount of the product available. For example when toilet paper prices increase, consumers tend to decrease the amount of toilet paper bought and to conserve existing stocks of toilet paper. For example, if the price of toilet paper were to double it would be highly unlikely that you would let your kids wrap themselves in toilet paper in order to pretend to be mummies and you wouldn’t use toilet paper to blow your nose. Furthermore, increased prices force consumers to look for cheaper alternatives, such as wet wipes or using a bidet. Increased prices lead consumers to limit their consumption and thus make the product in question available for the consumption of others.
Higher prices also tell suppliers to increase the quantity of a product available to the market. In the long run that means increasing production of the product. However even in the short run there are steps that suppliers take. Sellers begin searching for additional stocks of the product in question in areas where they wouldn’t normally look, such as distant locales or in the case of toilet paper, amongst hotels and universities. In the medium to long term prices are able to have their greatest effects. In the face of higher prices suppliers become much less wasteful, they start adopting more efficient methods of producing the product in question in order to maximize revenue. Increased prices also allow suppliers to reallocate products from lower value usages to higher value ones. For example specific fabrics required for medical grade masks are also used in the filters for air conditioners. When manufacturers of medical grade masks are able to charge more for masks, they gain the ability to outbid air conditioner makers for the fabrics, and are thus able to make more masks. Price increases lead suppliers to provide more of the product in question to the market both in the present and in the future.
There exists the very real question of what higher prices for products, especially basic products, mean for low income households. However, under a market system, even in the short term, products are available for sale, allowing households to choose whether or not to purchase a good at the higher price. Under other systems households are simply unable to buy the product at any price. We have seen time and time again that when prices are subject to government control only those with connections, the ability to negotiate complicated bureaucracies, or lots of free time are able to purchase products at the official price. These are traits which are not often associated with low income households. Furthermore alternative systems of rationing products, such as price controls, fail to create the means for resolving shortages as they are unable to cause increased production. Price controls merely perpetuate shortages and thus hurt less fortunate members of the society in the future.
Crisis prompts us to demand action especially when coupled with pictures of empty shelves and crowds of hysterical shoppers. It is important to understand that markets, when given the ability to function, not only help us in everyday life but also can help us overcome disasters.