The Economics of Price Gouging

By Jodi Beggs, About.com Guide

When demand for a product increases, it means that consumers are willing and able to purchase more of the product at the given market price. Since the original market equilibrium price (labeled P1* in the diagram above) was one where the supply and demand for the product were in balance, such increases in demand usually cause a temporary shortage of the product.

Most suppliers, upon seeing long lines of people trying to buy their products, find it profitable to, in part, raise prices, and, in part, make more of the product (or get more of the product into the store if the supplier is simply a retailer). This action would bring the supply and demand of the product back into balance, but at a higher price (labeled P2* in the diagram above).

Previous

• What Is Price Gouging?
• Modeling an Increase in Demand
• Price Increases Versus Shortages
• Arguments Against Price Gouging
• Income Inequality and Price Gouging

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