The factoid thrown around is that roughly 20% of the world’s oil supply travels through the Strait of Hormuz. Since it closed, my local gas prices in one area of the US midwest have gone from $2.60 to now $4.10 presumably as reserves have been used up.
I could understand a 20~30% increase in price to correlate with the reduction in supply, but what are the economic factors that lead to what feels like such a disproportionate increase?
If there are 300 life jackets on a sinking ship being sold for $10 each on a ship with 300 people on it. No problem.
No, imagine there are only 299 life jackets on that sinking ship.
The 2 people who want the last life jacket might be willing to bid quite a bit higher than $10 for it, even though the supply only shrank by a fraction of a percent.
In short, supply reduction doesn’t carry enough information on its own to imply how much the price will increase. “How fucked are the customers competing to buy the remaining product if they can’t get it” is the other key factor.
Ohh, I think there’s a problem…
What econ101 does to your brain is not normal. Into to Econ has y’all seeing a sinking ship and the first thing to ask is “how much is this life jacket worth in dollars”?
It’s a contrived example.
This isn’t hard to understand
Yes exactly. Replace the life jackets with Pokémon cards and the moral dilemma goes away. Cruise ships are required to carry enough life jackets and to give them to the passengers for free in an emergency. If someone is selling life jackets on a sinking ship then society’s rules have broken down, and it wouldn’t be surprising for people to get violent as they struggle to survive.
This is just an illustration and has nothing to do with the actual situation. Life vests are free in emergency. You’re making a fuss over nothing.
Completely agree, actually.
This isn’t what I think someone should do. It is morally abhorrent. This is just a contrived scenario to try and prime an intuition to help OP understand why small changes in supply can have outsized effects on price.
If at any point someone sees human suffering or danger and thinks “profit opportunity”, I have a hard time understanding why that person should be permitted to continue to participating in society freely.