Categories of Products
Prices of some categories of goods increase in the long run as demand rises, while others do not. Here we distinguish between products that are in limited supply, such as land, labor, raw materials, and sports and performance event tickets, and manufactured products, or ones that are in nearly unlimited supply in the long run. The latter category of products includes products such as grocery items, clothes, cars, and electronic products.
Products in Limited Supply
In the long run, prices of products that are in limited supply fluctuate much more with changes in demand than products that are in abundant supply. Examples of limited supply goods and services include land, labor, natural resources such as oil, gas and minerals, tickets to major sporting events (the World Series, the Superbowl, or the World Cup Soccer final), and products supplied by a monopoly.
If, for example, the demand for land in a certain area rises because of increased population and increased housing activity, the price of the land will increase. Because the supply of land is limited, the price of the land can remain high for a long period of time as long as the demand remains high.
Products supplied by a monopoly are limited because the firm may be the sole owner of a resource, or the firm may have a patent, a license, or other government approval to be the only supplier. The limited supply will cause the price of the product or service to be high and remain high in the long run if the demand is high.
Prices of products in abundant supply, or so-called manufactured products (except those produced by a monopoly), generally do not remain high in the long run. For example, let’s take a look at the price of cheese. When the demand for cheese increases, the price increases in the short run. A higher price of cheese means that profits for the suppliers will be higher, assuming that the cost of production remains constant. If the profits to produce and sell cheese exceed the average level of profits in other industries, more entrepreneurs (more cheese suppliers) will enter the industry. This increases supply and brings the price back down in the long run. Thus, in the long run the price will settle at a level where profits are normal or average and not excessive.
Prices of manufactured products are set such that they merely cover the cost of production, plus a fair (not excessive) allowance for a profit.