Via Economic Policy Journal

Joe Weisenthal is an interesting writer and thinker. He is co-host of the Odd Lots podcast and ‘What’d You Miss?’ on Bloomberg TV and editor at Bloomberg.

I have been following him for years at @TheStalwart.

I am not sure he would identify as a Lefty but he sent out a snarky tweet yesterday that sure fits into the Lefty model of not thinking deeply about economic issues.

Here is the tweet I am referring to:

Joe is missing a lot here.

First off, without price signals, manufacturers don’t know how intense the demand for N95 masks and Purell are.

Would people be willing to pay an extra $10 per item or $25?

This is important to know.

The higher the price, the more resources a manufacturer would be willing to devote to providing more supply.

To illustrate my point, let us, just for argument’s sake, say that people were willing to pay $1,000 for an N95 mask. Well that is a lot more than only being willing to pay $5.00 extra. Thus it tells the manufacturer that if a key component of the mask is in another part of the country or the world that it might make sense to have the part flown over by plane rather via usual ocean shipping modes.

In other words, the size of the price “gouging” signals to a manufacturer how aggressive he should get in making more masks.

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But that is not all.

Mask price “gouging” also signals to consumers how in demand masks are. If someone wants to buy a mask to travel by subway to go to a movie and the mask is $200, the consumer might think twice and not buy the mask, Thus leaving it for someone else. At the same time, a heart surgeon may want to buy a mask to travel the same subway to perform heart surgeries. He might be very willing to pay $200 for a mask.

Thus price signals provide much more complex signals then what Joe implied in his tweet that manufacturers only get the idea there is a lot of demand for masks. A lot of complex signaling goes on at different price levels to signal manufacturers, retailers and consumers.