This concept should turn capitalists from top dogs to lapdogs

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Everyone knows the price of petrol has jumped, and everyone knows – or thinks they know – why. Because Donald Trump’s war on Iran has prompted it to block the Strait of Hormuz. This has raised the cost of petrol around the world.

Sorry, that’s not quite right. What’s happened is that the producers of oil – and gas, for that matter – saw that blocking the strait would cause the demand for oil and gas to exceed the available supply. This meant they could charge a higher price for their oil without losing many sales of the stuff.

So while it’s true that all the wholesalers and retailers who stand between the oil producers and the final customers – you and me – can put their hand on their heart and say they had to raise their price because their costs had increased, the people who get the oil and gas out of the ground can’t.

They put their prices up for no reason other than that they knew they could get away with charging more. Does that shock you and make you want to rail against their selfishness? Why doesn’t the government stop them doing it?

Well, one reason is that economists know this is what happens in a capitalist economy. What’s more, they think it’s what should happen. It’s good for businesses to raise their prices whenever demand exceeds supply because this is the way the “price mechanism” eventually increases the supply of the more expensive item.

Supermarkets cannot........

© The Sydney Morning Herald