In economics, why must you increase the prices of your goods when the aggregate demand is rising?Can you not increase them? What will happen if you don't?

Expert Answers
pohnpei397 eNotes educator| Certified Educator

You are not required to raise the price of goods if aggregate demand is increasing.  Aggregate demand does not necessarily affect the price of any specific good.  Aggregate demand refers to overall levels of demand across all products.

If aggregate demand goes up, it simply means that consumers in general demand more products.  It does not mean that they are demanding more of your particular product.  It is entirely possible that aggregate demand rises but the price of some particular good remains constant or even drops.  This is because demand for a specific product is independent of aggregate demand AND because the prices of individual products are also affected by the supply of those products.  As an example, even as general price levels have gone up due to increased aggregate demand, the price of laptops has dropped because the supply of that product has increased.  Thus, an increase in aggregate demand does not automatically cause the price of every good to rise.

Furthermore, you are not required to raise the prices of your goods even if demand for your good rises along with aggregate demand.  You can keep your prices low if you want to.  You will, however, lose money.  You will not lose money compared to what you expected to make, but you will lose money compared to what you could have made.  When demand for your product rises, the equilibrium price of your product also rises (all other things being equal).  Even so, you can still sell for below the equilibrium price.  Your customers will be happy and you will easily sell your products, but you will not be making as much money as you could have made.