Transcript at any given price

Demand
And
Supply
Demand and supply do not have to be complicated. For some
students, there are, and I think it’s for three basic reasons. One is
that your textbook presents demand and supply in separate chapters.
In reality, these charts and graphs won’t help too much unless you
can work with demand and supply together. Another is that there is a
lot of unfamiliar and polysyllabic jargon, but the ideas are actually
pretty simple.
You want to have confidence in
yourself and apply common
sense. Of course, it’s only
common sense if you have it!
The third reason is that, like
math, the ideas build on each
other. If you miss a class
(including being just physically
present), you have to catch up
fast or you’re permanently
behind.
Demand
And
Supply
Well, let’s begin. First, there is a big difference
between demand and quantity demanded.
Demand is the amount of a good or service all
consumers, together, will buy at any given price.
You show it as a curve or on a demand schedule
(T-chart). Quantity demanded is the amount all
consumers will buy at a particular price. You
show it as a dot on the demand curve or a line on
the demand schedule.
Demand vs. Quantity Demanded: The blue curve
shows demand. The dashed vertical line up from 210
shows the quantity demanded at $425 per unit.
Quantity demanded is basically dependent just on
price. But many things determine overall demand.
One, demand depends on whether the good
or service is “in season”. Ice cream will sell
better in the summertime than it will during
a snowstorm.
Also, demand is affected by changing consumer
tastes. Someone shopping for basketball shorts
today might pay $20 for one of these Nike
models. For a Dr. J 1983 championship replica,
not so much. (Guys today show a little less leg.)
Another thing affecting demand is the availability of
substitutes. Not everyone has the same definition of a
substitute for each product (if Coke is liquid to you,
water’s a substitute; if it’s cola, Pepsi’s a substitute; if
it’s caffeine, then coffee is a substitute. But the more
substitutes available, and the cheaper they are, the
less demand will be for your product.
Are the boots
at right a
substitute for
the Uggs at
left? (LOWER
left, guys.
Come on.)
Now, once the demand curve is set, we can look
at it and ask how elastic or inelastic it is. Elastic
means stretchy, like the waistband of Dr. J’s
shorts. Elastic demand curves have a gentle
slope. Consumers like them, because with elastic
demand a small change in price has a huge
impact on quantity demanded.
Producers (suppliers), on the other hand, like
demand for their product or service to be
inelastic. Even a big change in price has little
affect on quantity demanded. So the producer
can raise the price and make a big profit. An
inelastic demand curve is steep, maybe almost
straight up and down.
Why is the
demand for
cigarettes so
inelastic?
Because they’re
addictive, and
addicts are not
‘sensitive to
price’.
What determines elasticity? A bunch of things. If there
are substitutes available (water ice instead of ice
cream), demand is more elastic. And if the price of a
substitute- the water ice- goes up, the demand for the
original product- the ice cream- also goes up.
Another thing affecting elasticity is whether the product
is a luxury or a necessity. Luxuries (“wants” that are
expensive) have more elastic demand than necessities
(things you need, especially if there are no substitutes).
The guy with chest pain will pay almost any price for
heart medicine: demand is inelastic. By the way, what
will happen to demand for the Mercedes (bottom right) if
the price of the BMW (top right) goes down?
And what
other
factors
will
determine
demand
for the
BMW or
the
Mercedes?
Now we are ready to tackle supply. For the demand
curves and schedules to be really useful, they must
interact with supply curves and schedules. So, here
goes. The good news is that a lot of the vocabulary
is similar. Just as with demand vs. quantity
demanded, the amount of a good or service all
producers are willing and able to sell at any given
price is supply (S). The amount of a good or service
all of its producers are willing and able to sell at one
particular price is the quantity supplied (qS).
The qS will be zero if the price
is set below the cost of
production. If the cost of making
a cake is $7, that is the lowest
its supplier would charge. Of
course it will try to charge more.
What seems to give some students trouble (probably the
same students who can’t remember that the public
sector is bigger in a command economy and the private
sector is bigger in a market economy) is that getting
Supply right requires you to think as a supplier. Most of
you haven’t been in business, so you don’t know what
it’s like to supply a good or a service. For a supplier, it’s
all about the profit motive. The quantity supplied will
increase if the price can increase, since a higher price
means greater profit.
“You can have
all the (root)
beer you want,
boys…at $20 a
pitcher!”
What determines how much a change in price will affect
the quantity supplied? You guessed it: the elasticity of
the good or service. If a price increase causes a large
increase in the quantity supplied, we say supply is
elastic. If a price increase causes little change in the
quantity supplied, we say supply is inelastic.
“Sorry, we’re out. Come back Thursday. We’ll have more then.”
In the short run, the supply
of most products is
inelastic. You can only
make your workers do so
much overtime before they
give out, and it takes time
to hire more people and/or
set up more production
lines.
Sometimes, there is no way to supply any more
than a single unit, as with rare art. That’s why the
price can get so crazy. We say there is zero
elasticity of supply.
Who
knows the
names of
the artists
or
paintings?
Sometimes, the government steps in to artificially increase
or decrease the supply. Say they don’t want you to smoke,
and they figure, “Let’s add another dollar of tax to each
pack of cigarettes.” That adds to the cost of production,
and so the quantity supplied of cigarettes should decrease
at any given price. But we know the demand for cigarettes
is inelastic: the addicts need their fix. So what will happen?
First there will be a shortage, as stores run out of
cigarettes. Then, the extra dollar in tax will be added to the
price of each pack and passed on to consumers.
=
At other times the outcome is different. The demand is
elastic so the supplier can’t charge more for the good or
service. The tax is added to the cost of production, and
the supplier eventually just produces less, creating a
permanent shortage. If the tax is greater than his profit
margin, this could drive him out of business. Some
people want the government to do this to those who
supply veal calves for slaughter, or build gas guzzlers.
The government can also get involved to encourage the
production of something specific that it would like to see
more of, either for its own use or consumers’. A
government grant, called a subsidy, to produce electric
cars would make them cheaper to produce, and
profitable at a lower price (so more people would buy
them). Or, the government can guarantee a minimum
price for something that’s produced, as it does with
many farmers. That guaranteed minimum price is called
a price support.
Finally, we have to tackle the subject of a
production schedule. That is too tricky to
illustrate. We might as well just use the
textbook and learn about marginal
product, the stages of production, and
marginal cost.
Your quest on Supply is Thursday. Friday, you will
have a current event due. If you are leaving for
spring break before then, do the current event in
advance. You probably won’t remember to do it
the weekend before you come back.