Demand and the price of air conditioning in urban Pakistan

Last week in my ECONS101 class, we covered the model of demand and supply. That model is surprisingly robust - it works well if all you are interested in is the direction of movements in price and quantity, when there are changes in market conditions. So, it is useful for working out what we should expect to happen when there is an increase in demand, as shown in the diagram below. The market starts in equilibrium where the demand curve D0 meets the supply curve S0, leading to an equilibrium price of P0 and the quantity of the good traded is Q0. When demand increases to D2, the equilibrium price increases to P2, and the quantity of the good traded increases to Q2.

Now, it may be difficult to believe that sellers always respond to changes in demand by adjusting prices. However, it does happen, especially when changes in demand conditions are predicable (such as between different seasons). Here's one example from Pakistan, as reported by Dawn.com last month:

As temperatures rise, cooling equipment vendors and traders see opportunities for business and profits. Vendors wait for the summer season to arrive so business can resume, and profits register upward trends. When the news channels announce heatwaves or an overall escalation in the city's temperature, shopkeepers in Jackson Market anticipate increased sales.

A businessman explained:

We earn more during heatwaves. People demand ACs especially during heatwaves because they can't sleep at night. People are so anxious that they are willing to buy a secondhand AC that hasn't yet been fully refurbished. We double the price of every AC during heatwaves.

An increase in demand is a representation of consumers' greater (collective) willingness to pay for the good. We should expect that, in a situation of higher demand, sellers will respond by charging a higher price. And that is exactly what is happening among air conditioning salespeople in Pakistan. In summer, when demand is higher, they charge a higher price (up to double) for air conditioning units.

[HT: Marginal Revolution]