Prices are high. Corporate profits are higher. Are consumers being gouged?

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It's an accusation being thrown around more and more. The Greens and consumer groups are among the most vocal accusers. It's easy to see why.

Consumer prices have increased by almost 30 per cent since 2020. While households have been struggling, corporates have been doing quite well.

Company gross operating profits have gone up by almost the same amount as prices since 2020: about 30 per cent.

With corporates raking in big profits while households struggle with high prices, it's no surprise accusations of price gouging are flying around.

There's just one problem with this narrative: having high prices and high profits doesn't really prove much.

Consider economic consulting services as an example (that is, the thing I sell).

If demand for economic consulting services doubled overnight, what would happen to my prices? What would happen to my profits?

The answer is straightforward: they would both go up.

If demand was to double overnight, my clients would start trying to outbid each other. They would offer higher prices so we do their project rather than someone else's.

The reason is simple: I can't increase the supply of economic consulting services easily. It takes ages to find good people and to train them up to scratch. In economics jargon: supply is inelastic in the short-run.

This means that if demand for economic consulting services goes up, then prices across the industry would go up.

What would happen to profits? They would obviously go up, too. If I'm selling the same amount of work that I was before, but now I'm doing so at higher prices, then by definition my profits would increase.

Am I price gouging? No. My customers are the ones who pushed up the price, not me.

Am I a monopolist? Also no. There are loads........

© Canberra Times