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    supply and demand

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    My question is :

    1)Why are prices generally higher for goods/services in London as opposed to Newcastle, or New York as opposed to San Fran?

    I understand that inflation is caused by excess demand/liquidity which causes the price of inputs such as raw materials to rise. But is the answer to the above question attributable to this fact. I don't feel it is because prices tend to rise higher in London as opposed to Newcastle as well. I felt that it is because the market can bear a higher price (taking into account competitive pressures) and the london economy can still grow because a great deal more money flows into it. To me this increased demand does not affect the price of inputs but does enable firms to charge a higher premium - is this true?

    2) If it is , then is there any difference at all between the kind of inflation thats pushes input prices up and the kind that allows firms to chrge higher prices because there is a higher demand in that part of the country? - because they both end up with the same result .i.e higher prices.

    3) by extension of logic , if a firm can (taking into account competitive pressures)charge a higher price in newcastle because of higher demand then will it - but this will have no impact on the price of inputs right?

    Long but interrelated questions - really hope you can help.

    Thank you.

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    Solution Preview


    I'll take a stab at this one and hope it helps.

    I understand the logic of your argument and at a basic level it makes sense. The whole thing comes back to basic supply and demand I feel but you also have to make a distinction between long term and short term.

    Obviously if in London people have higher disposable income than in Newcastle then the demand curve may be different, that's the effect you are describing. Thus a supplier could charge more in ...

    Solution Summary

    An understanding of supply and demand is applied. The expert determines why prices are generally higher for goods/services in London as opposed to Newcastle, or New York as opposed to San Fran.