They say that the current lumber and steel price hikes are coming from a shortage. I’d like to know who decides to raise prices when a shortage crops up. In theory, they could just keep selling the existing stock at the previous price, right? They’d just run out of it a lot faster. Then there wouldn’t be any lumber or steel left to acquire.
They don’t do this, this isn’t what happened. In fact, I haven’t seen anyone say that they haven’t been able to procure steel or lumber. Just that it’s expensive.
I suspect that what actually happens is that the cost of producing the good goes up. It went up because the factory is still paying people their wages but it had to do a lot of work to shut the factory down while COVID ravaged its workforce or disrupted the supply chain. That means that there were more days with less work for everyone to do, so the product that did get produced actually, physically, cost more money to make. The factory cost the same amount to run, but there was less product coming out of it.
Here’s a quick illustration of how I’d imagine that this works.
Let’s say on a normal non-delay day, a factory can produce 1,000 2x4s. It costs them $100 to acquire the underlying wood, pay their workers, and run the machines. Their costs per piece are $100/1,000 or 10c per 2x4. They add some markup and transportation costs to that and arrive at the $2.50 retail price.
Then COVID hits. A factory that was producing 1,000 2x4s a day is now producing 100. It still costs them $100 a day to run the factory. Their actual cost for that 2x4 is $1 a piece now. If they used their ‘normal’ markup of 25x to arrive at the price, it’d cost $25 a piece. Instead, they use a reduced markup and end up at $7.50.
Demand probably went down too, which meant that they’d need to charge more per piece to cover their costs.
So somewhere between their fixed base costs and the decline in revenue due to less stuff happening because of COVID, the price went up.