MUNCIE, Ind.–You’ll probably see prices going up in the coming weeks because of coronavirus, especially at small businesses. A Ball State University economics professor says those prices mean those businesses are having a tougher time than the big stores getting supplied.
LISTEN: Prof. Steve Horwitz discusses demand
But, that can eventually have a positive effect on the economy and on what people do with products, if the small businesses can survive, said Steve Horwitz, Distinguished Professor of Free Enterprise in the Miller College of Business.
“Small businesses in particular are under incredible pressure,” said Horwitz. “To the extent we see these sorts of price increases, it will almost always be small firms. Large firms like Kroger or Costco have such deep supply networks that they can just adjust their quantities by getting more product without having to change price.”
Horwitz pointed out that raising the price of an item signals to customers that they better make careful decisions about how much they buy and what they use it for.
“Imagine if this was bottled water. Raising the price means it’s less likely people will buy it to wash their dog. The higher price forces customers to ration their purchases. It means more of the limited supply to go around.”
He said as time goes by the small businesses that are able to make prices cheaper again as they figure out new ways to get their products and as the demand eases because people are self-rationing.
Horwitz also said the higher prices are not “gouging”.
“There’s no economic content to it. It’s a term that people use to complain when they think prices are too high,” he said about the term “gouging”. “What those price controls, those anti-gouging laws do, is perpetuate the very shortages we’re trying to solve.”
Horwitz said when prices are higher than normal, the self-rationing lowers demand and often helps those prices come down on their own.