Supply and demand are the two prime
factors that move markets, they are the most common of terms used by economists.
As per law of supply, when the price of a good is rising, producers or sellers
are more willing to create or sell that item therefore, increasing its supply
further and dragging its price higher with it. Companies are more willing to
produce an item whose price is rising. The reason why the price of a good rises
is because the demand for the product is high, which means more sales for the
company. Factors that motivates producers to manufacture an item is either the
rising price due to a shortage or the increasing demand which would turn up
bigger sales for their business.
The price of an item is dragged higher when companies raise market prices of
their products to protect their profit margins since their production cost to
manufacture extra items would go up, an example is having to hire more workers
to satisfy the needed quantity or by greed for bigger revenues through speculation.
This works when everybody thinks the price of a certain good would rise further
and every producer or seller would not want to sell at the current price. When
this scenario happens, it creates a shortage and the only way for them to finally
sell their good is raise the price triggering a psychological signal to sell.
Every company's goal is to maximize profits. To protect their profit margins,
the market price of the item has to increase otherwise, the firm would go bankrupt.
A price ceiling limits the price to go higher than what the government has set
this results in a shortage because companies would not spend an extra dime to
produce extra units of a high demand item. Why not produce more? because it
eats up their profits. What good is a business if you couldn't squeeze milk
and honey from it, so that means companies would try to nurse their production
costs by limiting what they produce so that they could preserve their profits.
The cause of a rising price is because companies are maintaining their ability
to profit since they have to spend extra money to produce more of their product
due to high demand.