By: Sterling Terrell
I wrote a post sometime ago titled: 30 Basic Points on Economics.
Point #5 was:
“Prices can decrease through more supply, less demand, or monetary deflation.”
It is plain, but so many can get confused in the details.
Market prices can only decrease by one of these taking place – or some combination of all three.
Take a 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.
Now with demand constant, if the available cotton supply increase to 120 million bales, prices would naturally decrease.
With supply constant, if cotton demand decreased to 20 million bales, prices would also decrease.
With More Supply and Less Demand, less cotton is wanted – relative to the amount of cotton that exists.
Finally, the only other way that prices can decrease is through monetarydeflation . Cotton demand stands at 100 million bales. Cotton supply stands at 100 million bales. The price of cotton can, however, still decrease. This happens when the government prints less money, relative to the amount of goods and services being produced in the economy. Average price levels fall.