"Teach a parrot the terms “supply and demand” and you’ve got an economist. "
– Thomas Carlyle
The first lesson of economics is that people respond to incentives. The second lesson is supply and demand. It's what happens when we apply incentives to markets. The nice thing about economics is that even the most complicated lessons can be captured by a simple parable. Supply and Demand can be bought with the parable of the price gouger. The economist Walter Williams (2004 explains.
In [hurricane] Isabel's wake, private contractors from nearby states brought their heavy equipment to Virginia to clear fallen trees from people's houses. Producers and shippers of generators, plywood and other vital supplies worked overtime to increase the flow of these goods to Virginians. What was it that got these people and millions of others to help their fellow man in time of need? Was it admonitions from George Bush? Was it conscience or love for one's fellow man? I'll tell you what it was. It was rising prices and the opportunity for people to cash in on windfall profits.
This parable teaches the three important virtues of free markets. We'll cover them in detail in the next post, but your homework assignment is to try and figure them out on your own.