Economics and emotions

A couple of months ago, when those who still power their cars on dinosaur juice were experiencing shortages, I expressed surprise that the prices hadn’t shot up as a result.

As Tim Harford points out in this very nice essay, though, one of the things that stops the market from behaving like a ‘perfect market’ is the emotional response of customers. The damage to loyalty resulting from such a change in pricing in times of difficulty is greater than the loss in potential profit… provided, that is, that the anomaly is short-lived. After all, I suppose, the smooth and swift response of the market to the imbalance of supply and demand can be significantly impeded by emotional words like ‘profiteering’!

Tim’s post is enjoyable and very readable, and talks about how we deal with such imbalances if they turn out to be more than just temporary. Recommended.

Thanks to John for the link.

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