Uncle Jack’s weekly summer Sunday BBQs brought together our extended family where the debates demonstrated views on a wide political spectrum – capitalist to communist. The conversations were always fascinating, lively, and respectful.
One Sunday, Jack’s nephew Marc, while arguing that the government should control prices, suggested that a bag of groceries should always cost the same $50.00. Responding to a question about Supply and Demand, Marc added that when prices are fixed Supply and Demand would not affect prices.
Taking a break from manning the grill, Jack, proposed a hypothetical. “Suppose a bag of groceries did cost $50.00 for all 100 people in the world and the bag always contained the same items, eggs, milk, butter, bread, juice, chicken, lettuce, and cumbers. In the beginning our supply chain would equal our demand chain.”
Continuing, Uncle Jack asked, “what would happen to the price of a grocery bag if the world population increased to 150 people? If there were more people demanding the same supply, naturally, a bidding war would follow. People would be willing to pay more for the same bag. As the government tried to control the cost a black market would develop where farmers would charge more than $50.00 per bag.”
“The same would be true if the demand from 100 people remained constant but the supply dwindled. If for example, farmers could only fill 50 bags the price would go up too.”
Marc understood. The only way to keep things affordable in an economy is to make sure the supply meets the demand. Artificial control creates inequity in prices.
The same holds true for housing. If we want affordable housing (and we do) in a market where the demand exceeds the supply the best way to achieve that goal is to increase the supply.