Approximation to a consumer price function under conditions of supply reduction and elastic supply curve
Under conditions where producers have the capacity to satisfy consumer needs, demand will be met through the market, in a buying and selling process.
A first approximation to this phenomenon tells us that the demand party must only possess the equivalent of the value of the good or goods they wish to purchase, and that the supplier is willing to sell to them.
However, a deeper look into the situation leads to a more complex system, with more variables. Some of these variables can be dismissed by economic science, such as the number of songs a consumer listens to from the moment they decide to go shopping until they actually carry out the activity. But others are of importance to science.
Thus, we can mention: the legal status of the good to be purchased ; availability of time to make the purchase in relation to the time needed to make it; and possession of the equivalent value in the specific good for exchange , to name a few.
These variables can be used to understand a specific market, although they are not the only ones, depending on the specifics of each market. While they have little relevance in contexts where producers can meet and exceed demanded production levels, the results may be different when faced with limited and insufficient supply in other contexts.
The availability of time to make the purchase in relation to the time needed to make the purchase:
When the time spent shopping is short, it doesn’t make sense to consider it as a variable. However, when it’s long, it can be a key factor in the decision to make a purchase, as well as in how to make it.
The time spent on a purchase is composed of the time it takes to arrive at the market and the time spent waiting there to make the purchase.
Arrival time depends on the relationship between distance and speed, obstacles, etc., required to reach the market. This variable generally has little impact on the consumption of normal goods. Although excessive distance reduces demand, consumption of normal goods is generally distance-sensitive.
Waiting time is due to the relationship between the flow of sales operations carried out in the market and the arrival of people to it, in a given period of time.
When the flow of arrivals exceeds the number of possible operations, queues form. The behavior of queues determines the wait time.
A primary cause of queues may be that, even though the seller can meet all demand given their production capacity, sales speed is limited given the flow of demand. In this scenario, queues can be resolved with simple solutions, such as increasing staff and vending machines, to name a few.
On the other hand, it happens that, in conditions where supply cannot satisfy demand or is reduced with respect to the market equilibrium point* at a given time, consumers concentrate in the market and compete for acquisition , thus also resulting in the existence of queues.
The productive limitation of supply implies that not all demand is satisfied. This means that whether or not to queue marks the distinction between being able to buy. Then, under conditions of reduced supply relative to an equilibrium point (whether specific to a market at a given time or a social optimum), queuing time becomes an unavoidable time expenditure for purchasing; therefore, it becomes a cost, either acquisition or opportunity. That is, a causal expense for being able to consume. (For this scenario, the solution lies not in the flow of sales, but in the ability to generate greater supply.)
This cost can be borne by the consumer, either by waiting in line or by paying someone who has waited in line. It can be a direct or indirect monetary cost (spending time in line and forgoing another remunerative activity). It can also be an opportunity cost, either because if the consumer doesn’t bear the cost of waiting in line, they won’t consume the good, or because the time spent in line can be spent on another satisfying activity.
Thus, the reduction in supply relative to a market equilibrium point, in the case of a necessary good, forces the consumer to make decisions. To buy or not to buy; both have a cost. If they decide to buy, they can either wait in line or pay the price of waiting in line in cash. The consumer cannot escape the cost to their consumption that the reduction in supply from an equilibrium point implies. This cost can be called the cost of scarcity, similar to the behavior of a tax, which, however, doesn’t even become a tax revenue. It can also be viewed as an entry fee. That is, the cost of scarcity is the equivalent of paying an entry fee (to the market) to consume.
In the case of Cuba, a scarcity economy, taking into account the particularities (the supply of goods from state and military companies is elastic [1] ), can be graphed as follows:
From the above, a better approximation can be reached to the cost structure, that is, the prices to satisfy consumer demand, under conditions of reduced supply and an elastic supply curve:
Actual acquisition cost [2] = Official acquisition cost [3] + Shortage cost.
**
[1] The quantity of goods offered by state-owned and military enterprises in Cuba is indifferent to the behavior of demand in many cases. That is, regardless of what demand is willing to pay, the prices offered (by state-owned and military enterprises) usually do not vary, even if the quantity offered varies.
No matter the quantity offered, the price will always be the same.
This is a price that is not subject to the relationship between supply and demand.
[2] The real acquisition cost is the expenditure incurred by the demand to obtain a good. It is, ultimately, a consumption function posed without income restrictions.
[3] The official acquisition cost of a good is the acquisition cost without the effects of scarcity and monetary multiplicity, etc. It can be seen as what a good would cost if there were no scarcity, monetary multiplicity or other effects.
It can be understood as the official price of a good.