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 concert tickets, and manufactured products. Manufactured products, such as grocery items, clothes, cars, and electronics, are ones whose supply can be increased relatively easily in the long run.

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.


Manufactured Products

Prices of products in abundant supply, or so-called manufactured products  generally do not remain high in the long run. The only exception is if a monopoly restricts its supply in order to keep the price high. An example of an abundant supply product is 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 most manufactured products (in a competitive market) are set such that they just cover the cost of production, plus a fair (non-excessive) allowance for a profit.