Five of Britain’s biggest energy companies were facing mounting pressure to cut prices last night after figures from Ofgem, the industry regulator, showed the average profits they earned per household leapt 40 per cent this winter to the highest level in five years.
Supplier profits rise in period of rising demand.
Is there nothing those bastard economists cannot explain?
Think of it the other way around. Some resource (anything, good or service in fact). Demand rises in the face of static supply. Thus prices and profits rise. So more peeps see the high profits and think, I\’ll have me some of that. They invest in a number of things to try and capture some of those profits. Finding more of the goods or service, producing more, perhaps looking for ways to substitute for the good or service. Either supply of the scarce resource, good or service increases, bringing down prices again or demand falls, bringing down prices again.
In this case, maybe more poeple drill for gas or perhaps someone comes up with an interesting and cheap way to insulate a house (as a bloke I know is thinking about. Why is it that lofts are insulated but not the floorboards between floors?)
Excess profits are thus competed away as excess profits are the signal that there are excess profits to be had.
No, no, you\’re right. Absolutely crazy system, never take off in a million years*.
* No, really: took Homo (of various different flavours, erectus, australopithecene, sapiens etc) a good two or three million years to work it out. First recorded explanation is probably 1776, Wealth of Nations.
Guys…in the comments there you\’re forgetting this bit. \”or perhaps someone comes up with an interesting and cheap way to insulate a house\”. Even if supply is constrained by barriers to entry, demand ain\’t.