Reply To: High demand causes entrepreneurs to…


My friend is trying to make sure he understands what you’re saying, he says this is what he gathers from your comments.

1. Demand for output up.
2. Price up –> Profit up.
3. Profit up –> Supply up.
4. Supply up –> Price down (by a lesser amount than in 2)
5. Demand for inputs up –> Price of inputs up.
6. Price of inputs up –> Supply down (by a lesser amount than in 4).

This doesn’t seem quite right to me. I’ve done some thinking and now it seems totally wrong, but I need help explaining it. Prices of inputs increase to the point where there is no longer profit potential