How markets use knowledge
The quality of substitutes for consumers and the cost of substitutes determine the shape of demand curve as I move away from the equilibrium point. The cost of production determines the shape of supply curve.
Titanium market: the equilibrium point is 10 billion pounds at 20 dollars each pound.
Now new demander seeks 6 billion pounds of Titanium at $20. So now the demand for titanium is 16 billion pounds at 20 bucks each pound.
Scenario #1
The supply curve and demand curve are both unit elastic.
When the equilibrium price rises to 25 dollars
Initial pounds Final pounds Change(absolute)
Old consumers 10 8 2
Suppliers 10 12 2
New consumers 6 4 2
The market rations the extra demand of titanium
Scenario #2
The demand curve is more elastic
When the equilibrium price is 25 bucks
Initial pounds Final pounds Change(absolute)
Old customers 10 6 4
Suppliers 10 11 1
New customers 6 5 1
Old customers behave strongly because they are very sensitive to the change of price, and they "contribute" more to the new buyers. Supplier don't change significantly because the price doesn't change so much.
Scenario #3
The supply curve is more elastic
When the equilibrium price is 25 dollars
Initial pounds Final pounds Change(Absolute)
Old customers 10 9 1
Suppliers 10 14 4
New customers 6 5 1
Supplier change behavior strongly because they are sensitive to the change of price. Customers are not because the change of price doesn't change a lot.
If a central planner wants to ration goods, he must be omnipotent and omniscient, knowing every single detail in the market, which is simply impossible.
With the self interest, not every one working in the public interest is actually thinking about public interest.
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