The myth of inflation part 2

- Les prix ont monté.
- Où ça ?
Goscinny/Uderzo, Obélix et compagnie.

One of the worst jokes played on humanity is the invention of inflation. This so-called economic "law" dictates that as the demand for a good rises, so does its price. In my mind, labelling this phenomenon as a law, i.e. an immutable fact of life that must be complied with, is either a blatant lie, a flat-out embracing of human greed, or an admission of our inability to handle the complexities of increased demand (i.e. that economies of scale do not exist yet).

When a supplier provides a good or service at a certain price, he is supposed to have included in this price the cost of the process needed to provide that unit of good, in addition to some margin of benefit that his market agrees to pay in return for the perceived value of the good.

Now when demand for that good rises, what happens? Up to some level of demand, the supplier sells more units without changing his process, because he must have originally foreseen some demand for which he invested effort and resources. Up to that first level, there is no rational need to increase the price. Indeed, increasing the price then would be ethically questionable - from the point of view of the "public good".

When the demand for the item rises above that first level, the process and resources of the supplier become stressed beyond his ability to deliver. At that point, the supplier will want to increase his production capacity, by investing further in his process, including human and material resources. During a transitional period, the supplier will be incurring additional expenses, some of which can be classified as asset and capital increase, and some others that count as a learning cost to function at a higher level of complexity. To cope with these expenses, the supplier will either dip into his reserve cash, or redirect some of his marginal earnings, or turn to institutional investors to help him out. However, at no point is he creating additional value per unit, and thus the market should not accept that the final price of the good increases! Further, once the manufacturing process is stabilized at the higher level, his total benefit should go back to increasing linearly with the increased demand.