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Response to dotymed (Reply #6)

Thu May 16, 2013, 08:13 AM

17. There are a few things in play here

First, you have the perception that that there is a shortage (real or imaginary is immaterial) which is causing panic buying patterns. People will buy more than they have a need which can quite easily move an imaginary shortage into a real shortage.

Second, government price controls. This has at least two impacts. If the allowable sale price is below the cost of production (say you can sell something at $2 but it costs you $2.25 to produce), this eliminates any incentive to make the product (creating a real shortage). Second, price can be a highly effective mechanism to control demand especially if there is a spot shortage of a product. People will buy a product up to a certain price, once beyond that price they will stop buying the product (or service) or find an alternative. Increasing prices also creates financial incentive for new producers to enter the market which increases the available supply of that product which in turn impacts the price of the product (unless there is collusion amongst the producers but that is a topic for another day).

Third, the Venezuelan government's nationalizing (or threatening to nationalize) industries (both foreign and domestically owned) has an impact. Nationalizing (or threat to) has a chilling effect on foreign investment (which, contrary to some folks here, is not all bad) in the means of production. Failing to have sufficient domestic capital to fuel expansion (in, say, the toilet paper industry), foreign investment provides the necessary funding to fuel the expansion.

Now these three issues are closely interconnected and feed off each other which can (and does) create an economic spiral that is difficult to overcome without overdoing it in one or more of these issues.

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