Supply is Elastic

https://marginalrevolution.com/marginalrevolution/2022/08/supply-is-elastic.html

Question

1. Did the people who planned the buy-back hope to increase the production of guns? 
2. Did the people who produced the 3-D guns response rationally? 
3. Do you think that the people who produced the 3-D guns sell them in gun shows or on the street? Why or why not?

A New Brand of Sticker Shock Hits the Car Market

The WSJ (Feb. 2022) reports that "With vehicles in short supply, prices are skyrocketing." 

Frackers Push Into Once-Dead Shale Patches as Oil Nears $100 a Barrel

The WSJ (Feb. 2020) reports: "Spurred by the highest oil prices in years, shale companies are moving drilling rigs back into oil fields that were all but abandoned a few years ago."

Soybean Prices Surge as South American Outlook Deteriorates

Drought in South America and higher prices for fertilizer have pushed up the price of soybeans (WSJ, Feb. 2022). Here are five questions.

1. How does a drought in South America (SA) affect the supply and demand of soybeans in SA? The equilibrium price and quantity of soybeans in SA?
2. How do the changes you describe in Q1 affect the supply and demand and equilibrium price of soybeans in the USA?
3. How does an increase in price of fertilizer affect the supply and demand and equilibrium price of soybeans in the USA?
4. What predictions about the equilibrium price and quantity of soybeans in the USA do your answers to Q2 and Q3 yield?
5. Why have farmers in the USA shifted from planting corn to planting soybeans as the price of fertilizer increases?

Price Controls, Black Markets, And Skimpflation: The WWII Battle Against Inflation

Here is NPR / Planet Money's account of price controls during WWII.

"The policy effectively neutralized one of the central functions of the free market, which is the allocation of scarce resources. In a free market, if there's not enough of something, the market responds by raising prices. This reduces demand for that product. It also sends a signal to businesses to produce and supply more of that product. Without this price mechanism, most economists believe, the market struggles to remedy shortages and society scrambles to figure out who gets what.

During the early 1940s, when the federal government began eliminating free-market pricing on goods in short supply, it had to begin allocating these scarce resources in a different way. It created a rationing system where the government assigned ration stamps to citizens."

"To buy products in short supply — like coffee, canned foods, dairy, meat, bicycles, cars, tires, gasoline, clothes, and sugar — American consumers not only had to pay money, they also had to use government-issued ration stamps. The aim was to limit the amount of a particular good or goods that any one person or household could purchase, and ensure more equitable distribution during wartime."

"To achieve all this, the federal government erected a sprawling and intrusive bureaucratic apparatus under the Office of Price Administration (OPA). During the war, the OPA and related agencies employed hundreds of thousands of federal employees and community volunteers, including twice the number of economists as the U.S. Department of Treasury. It's a lot of work to centrally plan an economy."

"without the ability to legally raise prices, businesses resorted to other tactics to maximize their profits. One is a phenomenon we've dubbed 'Skimpflation' at Planet Money. That's when instead of simply raising prices, companies skimp on the goods and services they provide, degrading the quality of the stuff they sell."

"'Another practice — dubbed the red market — was upgrading or selling a low grade of meat at the ceiling and point price of a top-grade cut,' Lingeman writes.

Other meat sellers simply ignored price controls and sold their meat on the black market. ... By all historical accounts, the black market for price-controlled products flourished during the war."

"With plentiful jobs during the war years and a system of equal rationing and price controls, the bottom third of American earners actually increased their meat consumption by around 17 percent, by one calculation. The top two-thirds, however, saw their meat consumption decline by around 4 percent."

"As the war came to an end, government officials struggled to turn off the system. In the summer of 1946, congressional legislation that authorized price controls lapsed, and food prices shot up. The cost of meat doubled. Cowering in the face of a public backlash, President Truman and a Democratic Congress reinstituted price controls on meat. This infuriated the meat industry. Once again unable to raise prices, many meat producers and sellers were reluctant to ramp up production, and many actively resisted doing so. Meat sellers, led by livestock ranchers, withheld meat from the market. One reason was anticipation that price controls would soon expire and they could make more money selling meat if they waited."

Kroger Sales Rise as Grocer Benefits From Consumers Eating at Home

Prices, quantities sold, and costs are all increasing at Kroger (WSJ, Dec. 2021). Here are some money quotes.

1. "Kroger Co. KR +0.07% reported strong sales for the latest quarter as consumers continued to opt for eating at home, but said higher supply-chain costs are squeezing its profit.
   
   "The Cincinnati-based grocer said it has more inventory today than a year ago and that it incurred significant supply-chain costs to keep its shelves stocked. At the same time, most products are getting more expensive and the company said consumers are becoming price-sensitive.
2. "The company said it is passing down costs to consumers where possible and is choosing to hold down prices in some areas. It is consulting its historical data to identify which items people are willing to pay up for.
3. "As meat prices remain high, consumers are switching to less costly types of meat or store brands.
4. "grocery sales are higher than they were before the pandemic, as people continue to work remotely and cook more at home."

The article illustrates several concepts.

1. An increase in demand and its impact on price and quantity
2. A decrease in supply and its impact on price and quantity
3. Substitutes, elasticity, and pricing
4. Using data to learn about consumers.

US Steel responds to higher prices

US Steel is building  a new plant (WSJ, Sep 2021). The new plant represents a long-run increase in supply.

Evidence that low prices (and binding price ceilings) reduce the quantity supplied

"Low Medicaid payment rates—about half of what private insurers pay for primary-care services—discourage doctors from participating. A 2019 government report found that only 70% of providers accept new Medicaid patients, versus 90% for private coverage. The disparity is more pronounced for family-practice doctors and psychiatrists" (WSJ, Sep 2021).

Copper Boom Has BHP, Freeport Picking Through Waste

Companies are extracting copper from what was formerly waste because the price has increased. (WSJ, June 2021) The increase in price => extraction => increase in quantity supplied.

How do producers respond to higher prices?

Farmers are planting more row crops in response to higher prices. (WSJ, March 2020) The reaction illustrates that the quantity supplied increases when price increases, all else constant.

What happens to price when supply decreases and demand increases?

The price of palm oil has increased (WSJ, Jan. 2021). Also note that earlier farmers responded to lower prices by fertilizing less, thereby reducing the quantity supplied.

Small drillers are turning off the tap because of low oil prices (WSJ, April 2020). Here is a money quote: "Better to keep oil in the ground than lose money selling it at current prices." When does the rig "lose money", when price is below average total cost or below average variable cost?

The Law of Supply

Price decrease => quantity of oil supplied decrease (WSJ, April 2020).

How to increase access to testing for cv

One effective way to increase access to testing for coronavirus is to increase the price paid to producers from its current level of $40 to $200 (https://marginalrevolution.com/marginalrevolution/2020/04/supply-curves-slope-upward-switzerland-fact-of-the-day-and-how-to-get-more-tests-done.html). If the federal government picked up the tab, estimated the extra cost would be less than $100 billion and a bargain compared with CARES Act and its $2.2 trillion price tag.

Why is the response to increase in demand for PPE slow in the USA?

One reason to encourage firms to raise prices when demand surges is to allow producers to accept the higher costs that they incur to ramp up production (https://marginalrevolution.com/marginalrevolution/2020/04/ppe-shortages-and-the-failure-to-increase-prices.html). The post also points out that the long-run response by producers to higher prices is > the short-run prices: over time either prices will decrease or consumers will purchase even more.