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The answer to the question of paying above market price is market power. When firms have market power beyond perfect competition they adjust prices above the th
by ThreeBeanPizza 4y ago
The answer to the question of paying above market price is market power. When firms have market power beyond perfect competition they adjust prices above the theoretical competitive level where marginal cost = price. A change in supply generally, ie shrinking, gives firms more market power to charge higher prices => inflation. Intrest rates really don't touch market power so it is pretty fair to criticize interest rake hikes as a solution here. Intrest rate hikes also slow down business investment which makes supply less responsive. But it REALY depends on the market. If you are importing a lot of goods from compaies with a lot of market power right now, ex: oil, your domestic government and the fed of your country can't do much to fight inflation other then to tamp down economic activity overall with interest rate. What is really the issue is government policy to combat inflation has fallen by the wayside since feds are more responsive.
- rcme 4y ago> Intrest rate hikes also slow down business investment which makes supply less responsive. That's kind of a simplification. Interest rates affect business investment. But many kinds of business investments are just "business" for other companies. E.g. when TSMC invests in building a new chip fab, they buy EUV systems from ASML. ASML uses that money to pay their suppliers and employees, etc. Also, interest rates affect real estate prices, which affects real estate development, which is a big source of employment. Government debt is also more expensive, so high interest rates also apply downward pressure on government spending. I agree that there's too much market consolidation, and that isn't impacted much by interest rates.