Economics V. Walker

 How do we make that decision -- Are we willing and able?  First, are consumers willing to buy -- do they want it?  Second, are they able –- is it affordable or worth the cost ?

 Demand = The amount of a good or service that consumers are willing and able to buy at all prices in a given period.  i.e. “per day” or “per week”  Quantity Demanded = The amount of a good or service that consumers are willing and able to buy at a SPECIFIC PRICE.  Market Demand = The sum of all individual quantities demanded in a market when economists talk about demand, they are usually referring to overall market demand.

 Law of Demand states that;  as PRICE increases,  DEMAND decreases  Price and quantity demanded move in opposite directions – inverse relationship  “most famous law in economics, and the one that economists are most sure of” – David Henderson.

1. A new video game system is released just before Christmas, and everyone's "gotta have it." As parents race to the store to buy the system for their kids, the price throughout December holds steady at $ What do you think will happen to the price in January? …February? …June? A: Demand will likely decrease; that is, people who have bought the system don't need to buy it again, so fewer potential customers will remain. Consequently, the price should decrease. 2. Local stores sell a fleece jacket for about $50. Sales of the jacket are good, but not great. However, when consumers learn that Lebron James wears this jacket, sales increase. What do you think will happen to the price? A.Demand increased, so the price will likely go up.

3. When a motorcycle manufacturer announces that it will no longer make its most popular model of bike, what do you think will happen to the price of the bike? A.Demand has not changed, but the supply has decreased, so the price will probably go up. 4. Mrs. Thomas sells red velvet cookies. They are delicious, and she is the only one in town who makes them. However, when Ms. Brown moves to town, she begins to make cookies, without any difference in quality or taste from Mrs. Thomas’ cookies. What will likely happen to the price of Mrs. Thomas’ cookies? A. Price should go down, because supply increased.

 3 factors that affect consumer spending – why price and quantity demanded move in opposite directions:  Diminishing Utility – less joy out of one more  People will buy more, even if there is less utility, but only for the right price – “Buy three get the fourth free” – do you really need or want four big macs? Maybe. If price is low enough, people may still want to buy that additional item…  Income Effect – people’s money is limited, cannot always buy the same amount at that price.  Substitution Effect – substitute goods that can fulfill the same need – people sub the cheaper good in…e.g. Uggs vs. no-name Ugg-like boots.

 Demand can be influenced by price – movement along the curve is: Change in the Quantity Demanded.  Affects the willingness to purchase a product  Demand schedules – show quantity that would be purchased at a specific price.  Using this information gives us a Demand Curve (can actually be curved)  Shows what people will buy at specific prices – relationship between price and quantity buyers are willing & able to buy.

 Changes in Demand – happen when quantities change at ALL prices  Demand can increase or decrease  Always caused by outside factors  Decrease in demand shifts demand curve LEFT  Increase in demand shifts demand curve RIGHT  When curve moves it is referred to as a demand shift  Price does NOT affect this, other factors do!

 Demand effected by demand shifters  Anything that alters what a person may desire  Change in Income  More money, more goods; less money, less goods  Change in # of Consumers – more customers --- or less. Can be a seasonal change. E.g. my home state of RI – swells with tourists in summer; only locals in winter.  Changes in Tastes/Wants – Cravings, fads, etc. Sushi! Advertising plays significant role. Can you think of a good that you wanted due to advertising?

 Changes in Expectations  Poor review of a good, govt. report, regulations…  Change in Price of Substitute Good  Movie tickets vs. Redbox, tacos vs burritos…  Change in Price of a Complementary Good  Good that is usually associated with the other (e.g. tennis rackets & tennis balls; Skis & ski boots; printers & ink cartridges)

P Q o $ PQDQD $ Price of Tacos Quantity of Tacos Tacos Plot the Points

55 P Q o $ PQDQD $ Price of Tacos Quantity of Tacos Tacos Plot the Points

35 P Q o $ PQDQD $ Price of Tacos Quantity of Tacos Tacos Plot the Points

P Q o $ PQDQD $ Price of Tacos Quantity of Tacos Tacos Plot the Points

P Q o $ PQDQD $ Price of Tacos Quantity of Tacos Tacos Plot the Points

P Q o $ PQDQD $ D Price of Tacos Quantity of Tacos Tacos Connect the Points

P Q o $ PQDQD $ D Price of Tacos Quantity of Tacos Tacos What if Demand Increases?

P Q o $ PQDQD $ D Price of Tacos Quantity of Tacos Tacos D’ Increase in Demand Increase in Quantity Demanded

P Q o $ PQDQD $ D Price of Tacos Quantity of Tacos Tacos What if Demand Decreases?

P Q o $ PQDQD $ D Price of Tacos Quantity of Tacos Tacos D’ Decrease in Demand

 mesandActivities/Supply-and-Demand- Interactive-Chart.aspx mesandActivities/Supply-and-Demand- Interactive-Chart.aspx

 Market Demand – includes the sum of all the desired amounts from all those in the market  The usual reference to demand in an economy  Demand Curve – movement along this line known as – change in market demand

Now…about SUPPLY

 While buyers want more at a lower price, sellers do NOT want to sell MORE at a lower price.  Sellers want to sell at higher prices, and are less likely to sell the same amount at lower ones  Quantity supplied – amount of product person is willing to sell at a specific price  Supply – amount of all producers willing to sell at a specific price during a specific time  Ex. 315,000 tacos in a week

 Just like demand, we use a supply curve to show what people are willing to sell  Supply curve – shows amount at specific prices  Market Supply – sum of all suppliers at a price

Graph should take the sum of all 3 taco places and place them at the specific prices they want to sell at

 Multiple reasons for changes in supply  Very similar to changes in demand  Called supply shifters  Graphing Shifts in Supply Curve  shifts in quantity caused by numerous things  decrease in supply shifts the curve left  increase in supply increases supply to the right

 Changes in the cost of inputs  when factors of production price increases/decreases, supply curves will shift  Changes in the number of suppliers  the more people there are the higher the supply numbers and visa versa  Changes due to natural disaster or international events  major events such as this can decrease supply greatly  Changes in technology - can increase supply by increasing productivity

 Changes in producer expectations  If market price is low, producers may purposely limit the supply to get a higher price  Changes in government policy  Can affect in two different ways  Subsidies – cash payments to help producers  Happens with US farmers. Govt pays them NOT to produce goods; keeps prices higher  Excise taxes – taxes put on goods  Govt controls price by making it more expensive to make

 Elasticity – how much stretch the quantity demanded or supplied has when price changes  degree of elasticity tell economists how responsive consumers are to changes in price  Demand elasticity – shows consumers response to price  inelastic – consumer response is slight or not at all  usually this way with necessity products  elastic – consumer response to price change is large; would buy something else if price rose  Supply Elasticity - Measures producers response to price changes  as prices rise producers want to make more  elastic producers will increase production when prices rise  inelastic producers can’t change production due to a price increase

 Calculations tell you whether a reaction is elastic or inelastic  Demand elasticity = (% change in qty. demanded/ % change in price)  Supply elasticity = (% change in qty. supplied/ % change in price)  Ex. 75% (change in qty.)/ 50% (price change) = 1.25  Numbers determine elasticity  If below 1, it is inelastic; if greater than 1, elastic  If equal to 1, it is considered to be unitary elasticity

 Second way to measure elasticity is thru the Total Revenue Test  Compares prices and quantities at different prices to see where revenue goes.  Calculated by quantities x price – put into chart  If revenue continues to rise – inelastic  If revenue continues to fall – elastic PriceQuantity Demanded Total Revenue $ $60000 $ $57000 $ $56000 $ $50000 $ $33000 PriceQuantity Demanded Total Revenue $ $20000 $ $28500 $ $34000 $ $38750 $ $42000

 Graphs can also show the elasticity of goods  Steep slopes show inelasticity  Shallow slopes show elasticity  Found by graphing two points  Graph the initial price and quantity and the NEW price and quantity

 Availability of substitutes – if there are multiple substitutes makes the product elastic  Price v. Income – what the increase in price is to your level of income  Necessity v. Luxury – necessities usually considered inelastic  Time needed to adjust – more time it takes for people to adjust can change elasticity rates

 Availability of inputs – not being able to get goods can slow production  Mobility of inputs – how easily products can be moved to where they are needed for production  Storage capacity – ability to store goods for production  Time needed for adjustment – additional time allows supply chain to have time to get to producers

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