Why is everything getting more expensive?

Remember when you could walk into McDonald’s with RM10 and get a decent meal, but now you’re looking at spending RM15-RM20?

If you’ve ever wondered that or know the answer (I’m looking at you economics students), check out this short article for a quick lesson in introductory economics and some perspective on the demand and supply factors going on in the world right now.

Economics 101: Prices are determined by the law of supply and demand

To simplify supply, it’s where producers make a good and set the price based on factors like production costs.

To simplify demand, it’s where consumers purchase a good at a prices based on how much they value the good.

Anything that increases demand makes the demand curve shift right.

Anything that reduces supply makes the supply curve shift to the left.

Researcher’s Note: For further reading, check out concepts like Marginal Utility and Marginal Costs to gain greater insight into these concepts.

Demand is Up 

In early 2021, prices began to rise. The reasons are numerous and complex at a micro-level. But simplified, it’s the movement of the forces of supply and demand.

Starting with demand, during the lockdown, individuals have been staying at home to curb the spread of Covid-19. Hypothetically speaking, they are likely to spend less and save up, which will leave them with more money to shop as lockdowns eased. However, with that comes a rise in consumption due to very high demand for a range of goods and services which include dining out and experiential events (movies, concepts, clubs etc).

Both of These factors could lead to a rise in demand.

Supply is Down 

More interestingly, let’s talk about supply:

If you didn’t know: the world is made up of complex supply chains and your “iPhone” doesn’t just come from Foxconn in China. The components to make an iPhone come from multiple countries: Semiconductors come from Malaysian listed firm Inari. The battery comes from China and from the US, its glass screen and audio chips.

A key point to note about  global supply chains is that most components travel by cargo ships, and currently there are blockages at ports due to logistical issues, to illustrate this there are “Over 70 ships containing 500,000 containers are waiting offshore right now” (Kyla Scanlon).

(The Guardian, 2021)

Problem #1: Supply chains have gotten more volatile thanks to Covid-19

Manufacturers canceled orders of semiconductors during the start of Covid-19 and contrary to their assumption that demand will fall, demand remained high as more people purchased electronic goods. 

With factories in China shut down to prevent outbreaks, this has led to stalled supply chains and an aggregated online retail demand, resulting in higher prices for goods. 

Problem #2: Even if ports were larger, there’s a current shortage of truck drivers and railway workers to transport cargo from shore to land.

A great example of this is the United Kingdom. Many lorry drivers  from Europe, and because of the lockdown, they went home. With Brexit, it was likely best to stay home as it’s harder to get a work permit, as they’ve left the “EU single market”.

The government has tried to resolve this problem by issuing temporary visas.

The surge in demand coupled with congestions in the logistic networks and labour shortages have negatively affected the availability of goods available.

So, supply shifts to the left due to the external supply shocks combined with the rightward shift in the demand curve has led to quantity falling and prices rising.

When prices rise in a given period, this phenomenon is known as inflation.

 

But, there’s another factor to inflation, and it’s the role of expectations.

If people expect higher inflation (say because governments have engaged in “money printing”), workers will demand more pay because their purchasing power has decreased. 

If their wages do not rise, then they can afford less goods than they did before. Thinking about this intuitively, if your allowance was RM100 2 years ago and was the same right now if prices rise you can’t purchase the same basket of goods you did before.

Assuming firms do not object to this, firms have to raise prices because their production costs have risen, which will eventually lead to higher prices for consumers. 

So if everyone is expecting inflation, it is a self-fulfilling prophecy as everyone acts in their own self-interest. 

Concluding thoughts

Prices rising on consumer staples seem inevitable if technological progress isn’t being made to increase efficiency. Surprisingly, some items such as televisions have gotten cheaper, as firms that keep up with technological progress have found ways to reduce production costs, thus resulting in a fall in the price.

To conclude, price rises are inevitable in the long run for most goods. Therefore, we should be prepared to fight an uphill battle, which can be accurately depicted through the following illustration:

(Source: 10k Diver – Twitter)

References

Costello, S., 2021. Where Is the iPhone Made? (It’s Not Just One Country!). [online] Lifewire. Available at: <https://www.lifewire.com/where-is-the-iphone-made-1999503> [Accessed 17 November 2021].

Goodman, P., 2021. How the Supply Chain Broke, and Why It Won’t Be Fixed Anytime Soon. [online] Nytimes.com. Available at: <https://www.nytimes.com/2021/10/22/business/shortages-supply-chain.html> [Accessed 17 November 2021].

BBC News. 2021. How serious is the shortage of lorry drivers?. [online] Available at: <https://www.bbc.co.uk/news/57810729> [Accessed 17 November 2021].

Kulwin, N., 2019. The falling price of a TV set is the story of the American economy. [online] The Outline. Available at: <https://theoutline.com/post/8421/smart-tv-cheap-roku> [Accessed 17 November 2021].

Scanlon, K., 2021. Why are Supply Chains Failing. [online] Youtube.com. Available at: <https://www.youtube.com/watch?v=Oia5Tbef238&t=134s> [Accessed 18 November 2021].

Smith, D., 2021. Biden orders companies to ease supply chain bottlenecks or he’ll ‘call them out’. [online] The Guardian. Available at: <https://www.theguardian.com/us-news/2021/oct/13/joe-biden-supply-chain-ports-bottlenecks> [Accessed 18 November 2021].

10-K Diver, 2021. [online] Available at: <https://twitter.com/10kdiver/status/1458758907460038661> [Accessed 18 November 2021].


Researcher: Muhammad Bahari

Reviewer: Myra Kiastina

Editor: Jessie Gan

Download Article: Why-do-prices-go-up.pdf


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