Saturday, August 27, 2011

Hurricane Economics 101: Quantity Demanded is Greater than Quantity Supplied. If the price is not permitted to rise, the outcome IS predictable...

Quantity Demanded is greater than Quantity Supplied...The price is "too dang low!"...
Source: Drudge Report

Most businesses do not have "back rooms" anymore that hold excess inventory. They place and recieve the orders "just in time" as they sell existing stock.  This efficiently reduces the carrying costs of inventory. It just makes sense for 99.99% of the time businesses are open.

The store suppliers hold as little inventory in warehouses for the same reason. So and so forth down the rest of the supply chain.

As a result, excess capacity in ANY supply chain is very minimal.  In the event of a natural disaster, it is very difficult (impossible?) to ramp up production and deliver goods fast enough to cover an unexpected and immediate increase in demand. 

Given this situation, there are only 3 things that can happen at the point-of-sale pre and post-disaster: Stores can employ the non-price stategy of rationing by limiting quantities people can buy, (2) do nothing-- keep the price the same and sell out quickly (see picture above), (3) allow the price to rise and let the price mechanism serve as the rationing method.

Oh, I forgot one---rely on the good nature of people to not panic and to take only what is necessary.

I will leave it up to you which of the above would be the most effective method for rationing a limited quantity of goods people need in an emergency. I know what economic theory would suggest...
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