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Economics: Price Increase | SterlingTerrell.net

Economics: Price Increase



I wrote a post sometime ago titled: 30 Basic Points on Economics

Point #4 was:

"Prices can increase through less supply, more demand, or monetary inflation."

It is a fairly straightforward fact.

Prices can only increase by one of these taking place - or some combination of all three.

Take some simple commodity as an example: Cotton, for instance.

If the world wants to use 100 million bales of cotton per year, and available supply is 100 million bales, say cotton will be $.70/lb, for instance.

Less Supply
Now with demand constant, if the available cotton supply falls to 20 million bales, prices would naturally increase. 

More Demand
With supply constant, if cotton demand increases to 200 million bales, prices would also increase.

With Less Supply and More Demand, more cotton is wanted - relative to the amount of cotton that exists.

Inflation
Finally, the only other way that prices can increase is through monetary inflation. Cotton demand stands at 100 million bales. Cotton supply stands at 100 million bales. But,the price of cotton can, however, still increase. This happens when the government prints more money, relative to the amount of goods and services being produced in the economy and average price levels increase.