The Role Of Markets In A Disaster

Derrell Peel - Oklahoma State University

Markets are the primary means that the production and consumption of products are coordinated in the U.S. economy. Normally markets ensure that supply and demand are in equilibrium, or close to it, at all times and respond to changing conditions through countless small adjustments made constantly by producers and consumers. Market adjustments are typically very subtle and commonly overlooked. A freely-operating market economy moves through time much as driving a car depends on a constant stream of tiny adjustments rather than violent swings of the steering wheel to the right and left. However, sudden, large shocks disrupt the balance of supply and demand and reveal how dramatic market actions occur that help reestablish equilibrium. The recent fire at the Tyson beef plant in Finney County, Kansas is just such an example. It is much like throwing a rock into a pond resulting in a big initial splash and ripple effects spreading out in all directions. The initial splash of the plant closure included a dramatic set of market reactions. With fresh beef production suddenly decreased, boxed beef prices rose sharply to ration a suddenly limited supply. Choice boxed beef prices increased by over $22/cwt. or 10.3 percent in one week. This illustrates one of the most important functions of markets (one that is commonly taken for granted): markets make sure that we don’t run out of things. With less supply available, the market uses higher prices to determine how limited beef supplies will be allocated. It is a common market reaction. When a freeze hits Florida, orange juice prices begin to rise immediately, not because there is an immediate shortage of juice but to make sure that the current supply continues to be available over time. Markets will never tell a consumer that they cannot have a product but prices will rise enough to convince some consumers not to consume as much of the product at this time. The corollary to the above is that markets make sure that we don’t waste products. This is particularly important for perishable products...MORE