Producer-led Price Declines

In the paper today
Tales of war and waste
But you turn right over the the TV page
--Crowded House

ECON 101 tells us that lower prices occur when supply increases relative to demand. What policy decisions of producers drive prices lower?

One is improving productivity. Implementing projects that create more output per unit of input means that dollars are spread across more goods, thereby reducing price per unit.

Another is adding more supply than necessary to meet demand. By building more capacity than is needed, capacity utilizations fall, causing operators to reduce price in order to move more units.

Improving productivity increases social welfare because it more fully utilizes productive resources to alleviate scarcity. Adding unnecessary capacity is wasteful to the world because it ties up resources in unproductive endeavors.

In unhampered markets, lower prices achieved by improving productivity are rewarded while lower prices stemming from adding unnecessary capacity are penalized.