Monday, 17 January 2011

Supply and Demand After Disaster

The economic model of supply and demand is often applied as justification for changes in price. In the years immediately prior to the 2010 financial crisis this was evident in the price of commodities like aluminium and copper as against the global stocks of those materials. It's no surprise to anyone that as the global stocks diminished, market prices rose.

After the floods in Queensland (and now Victoria) the prices of goods produced in destroyed agricultural areas has already begun to rise. Fruit and vegetables are being sold at higher prices, and I expect that if they're left to market forces they will remain high for about a year, or at least until the farms are rehabilitated and able to produce crops again. That was the experience of banana prices after a cyclone destroyed banana crops in north Queensland earlier in the decade.

Diabolically, we could apply this to other goods and services. Demand for food is the same and supply has dropped. Demand has climbed for other things like electricians, builders and housing. In a pure supply and demand economy, these service providers would be well within their rights to raise prices. Imagine for a moment that we apply the same increases in food to these services as well. Rent doubled or trebled? It sounds ludicrous, and yet the local papers are already reporting trades scams and exorbitant prices.

This is one risk of an unregulated freemarket economy. Our society needs strict economic regulation to take into account the additional demand from society: a demand for human dignity. This is an opportunity to look for cracks in the regulations, and to ensure that our society is built around the needs of the people rather than the exclusive needs of the economy.
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