MapleStory Economy & College App Essay

Wait a minute. Doesn't an increase in supply result a surplus at the initial price, causing a downward pressure on the price as suppliers try to get rid of the excess stock? Wouldn't that cause the equilibrium price to fall instead of rise?

Note: Assuming that Demand remains constant, that is.

Whoa! That one question assumed a lot of things all at once.

An increase in supply would result in a surplus if the price doesn't change, but it does. It would cause a downward pressure if demand drops as a result, bringing the price back to the original equilibrium. But what if demand remains constant, such as the oil industry?

You want demand to remain the same. Okay. Say supply increases, because a lot of money is being made in a given market. Suppliers want to make as much money as they can. So price goes up. They wanna see how much they can ride the good times. If demand remains constant, that's a thumbs up sign to keep things going. It is showing suppliers that elasticity to price isn't bothering demand. You would otherwise be looking at a vertical supply curve.

Another reason prices increase when supply increases is due to speculative reasoning. If a consumer fears prices will continue going up, he/she will buy at the current market price to avoid having to pay even higher prices in the future. This indirectly causes prices to go up because the supplier will be able to put into motion higher supply, lowering average cost due to expansion, but still desiring to 'surf the price wave'. If demand sinks, that's when prices drop. Lowering average cost due to technological gains doesn't necessarily mean prices can drop, because you're able to pad the margins. This changes the insight to the previous comment regarding the ability of a firm to lower price due to economies of scale.

Special note: if you follow this reasoning, it is easy to understand how depressions and bubbles form!

This.

When prices go up, it's usually if the demand is high or if there is scarcity. This is where MS fits in.

For example, look at The Great Depression. Most notably produce and Henry Ford's Model A car. Both dropped in price due to overproduction or a drop in demand (although, Ford was more or less closer to demand dropping than overproduction). What happened? Both drop in price and a drop in production, which then caused its demand to rise back up.

Scarcity in the long run does not fit in the MS world, a world filled with infinite goods/mesos. The scarcity factor in MS doesn't often take into effect since demand must remain the same for higher price and lower quantity to occur. But in MS, demand doesn't stay the same for scarce goods. :p If you are a Keynesian economist, you have to believe prices go up mostly due to demand. If you are a supply side economist, you believe demand is being created, not responded.

Higher production does result in economies of scale, lowering average cost, allowing a manufacturer to lower the price if it isn't set at a mass market price. Keep in mind if demand is low, the price could be dropped but the cost could be subsidized by the manufacturer. This happens with televisions, cars, and gaming consoles quite often in today's markets.

Prices can increase if supply increases, which may or may not be due to higher demand. A decrease in the cost of raw material could increase supply, which could cause an increase in price as well.

Yes, for example, when the nintendo wii came out, there was no way they could meet supply, so the price of them fell through the flo- OHWAIT they being resold for massive amounts over the RRP. The television set thing, if its actually happening, I don't really pay huge attention to tv prices, would be because of an oversupply, or drop in demand which lead/is leading to an oversupply

That is a bad example, I'm sorry. Supply was low for small intervals of time due to Nintendo not anticipating high demand. At that point, if demand remains the same while supply decreases, then the result will be higher equilibrium price and lower quantity, ergo, the Ebay effect. Over the year's period of time, supply did increase overall, and so did the price.

A good example to note prices falling with supply falling accordingly is when graphics cards or processors are being EOL. You will usually see companies selling off remaining stock of the goods at good prices to stimulate some demand but not for the long term of that good, since it is being EOL'ed.