Reply #5: Demand is rarely as flexible as [View All]

[necso]

some economists would like to have one believe.

And if costs go up, for the same level of spending you get less inventory and can make less product. So when costs go up (and selling prices go up -- if one can raise prices) supply can lag behind (inflexible) demand. If more profit cannot be squeezed out of higher prices, there can be long term supply problems, as working capital does not rise with prices. Of course one can use higher borrowing to offset the problem, but it does not change the dynamic.

You can also get speculation and hoarding phenomenons, which act to reduce available supply. That is, demand can go UP and supply DOWN as prices go up. Indeed, since speculators effectively control many fundamental items, like oil, it can be expected that a speculation binge will reduce supply as a commodity is held off of the market in expectation of higher prices and this may result in a sharp rise in prices, at the same time as supply goes down. For many commodities, there is, in the best case, some delay to increase supply -- should any supplier see it in his interests to bear the costs and risks (market may go down) of increasing supply because of a "temporary" supply deficiency.

Of course, you can add to this, suppliers deliberately reducing supply to jack prices up further.

The market does not really work like Economics 101 portrays.