Understanding Economics Value and Demand First discuss the

Understanding Economics Value and Demand.

First discuss the following: You have graduated from college. You are pooling your own money with money from friends & family, and… Starting a manufacturing company: 1. 2. 3. o o o Chocolate-covered jalapenos in attractive packaging, OR… Indoor Formula-1 ‘Karting’ business with faster, more realistic karts, OR… Fingernail polish made from natural Biopolymers that is stronger, shinier, and healthier. Questions: How do you know how many to produce? How big a factory? What prices to charge?

What Is Demand? In a “Free Market Economy”: o Buyers determine demand. o Sellers determine supply. o The price is determined by the equilibrium point. o Government’s role is to enforce contracts and protect private property o On average, supply is sufficient to meet the demand.

What Is Demand? (cont. ) In a “Command Economy” (Socialism, Fascism, Marxis m, Communism) o The government determines the supply levels and sets the price. o Results in shortages and long lines at the supermarket o Result: An underground market develops

Command Economies from the previous slide… ¡ ¡ ¡ Socialism – the government owns the “factors of production”. Normal business management principles are abandoned (efficiency, quality control, accountability, etc). Everything becomes ‘politics’. Fascism – the dominant “Party” is all there is. The government and the Party are one and the same. Everyone else is labeled “the enemy” and either shot or discredited. Marxism/Communism – the workers are encouraged to rise up and violently revolt against the owners of land capital. All private property is confiscated at gunpoint. Societal fabric is destroyed on purpose. A small group of men at the top run everything.

The Demand Curve Market Demand Curve for Strawberries Market Demand Schedule for Strawberries Point on graph 2. 50 7 a 2. 00 9 b 1. 50 11 c Price ($ per kg) Quantity Demanded (millions of kg) a 2. 50 b 2. 00 c 1. 50 D 1. 00 0. 50 0 1 3 5 7 9 11 13 Quantity Demanded (millions of kg per year) Important: this is ‘market’ demand, not just one individual’s demand

Deriving Market Demand 2. 50 2. 00 1. 50 1. 00 D 0 0. 50 Your Friend’s Demand Curve for Strawberries Price ($ per kg) Your Demand Curve for Strawberries You ($ per kg) (D 0) 2. 50 2. 00 1. 50 Your Friend (D 1) Market (Dm) (kg per month) 1 2 3 4 3 5 7 1. 50 1. 00 D 1 0. 50 Market Demand Curve for Strawberries Price ($ per kg) Price 2. 00 5 0 1 2 3 4 6 7 Quantity Demanded (kg per month) 0 1 2 3 7 5 6 4 Quantity Demanded (kg per month) Individual and Market Demand Schedules for Strawberries 2. 50 2. 00 1. 50 1. 00 Dm 0. 50 0 1 2 3 4 5 6 7 Quantity Demanded (kg per month) Here, you and your friend comprise ‘the market’

Market Demand Important to understand: § The ‘market demand curve’ refers to the sum of all individual demands for that particular good or service. § Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

Changes in Demand ¡ Changes in the quantity demanded l l This is simply moving up and down the existing demand curve. The demand curve itself doesn’t shift. Versus… ¡ Changes in demand: l l This is where the whole demand curve shifts left or right. Caused by changes in the demand determinants (see a future slide)

Change in Quantity Demanded vs. Change in Demand 2. 00 a b 1. 50 1. 00 D 0 0. 50 0 5000 6000 Quantity Demanded (pairs of skis) Change in Demand Price ($100 per pair of skis) Change in Quantity Demanded 2. 00 1. 50 1. 00 D 0 0. 50 0 D 1 5000 Quantity Demanded (pairs of skis)

Changes in Demand Where the entire demand curve shifts left or right… Market Demand Curve for Strawberries Market Demand Schedule for Strawberries 2. 50 2. 00 1. 50 Quantity Demanded (millions of kg) (D 2) (D 0) (D 1) 5 7 9 11 13 Price ($ per kg) 2. 50 2. 00 1. 50 D 2 1. 00 D 1 0. 50 0 1 3 5 7 9 11 13 Quantity Demanded (millions of kg per year)

Demand Determinants cause the whole demand curve to move right or left ¡ Demand determinants l l The size of the market (the number of buyers) ¡ An increase causes rightward shift in demand curve Change in Income ¡ For normal products, an increase causes a rightward demand shift. ¡ For inferior products, an increase causes a leftward demand shift.

Demand Determinants ¡ Change in the price of other products l l For substitute products, a rise in price of the substitute causes a rightward demand shift (demand goes up for the original product) For complementary products, a rise in the complementary product’s price causes a leftward demand shift (demand goes down for the original product)

Substitute goods

Complementary goods

More Demand Determinants ¡ Consumer tastes and preferences l l A gain in popularity causes a rightward shift in the demand curve Discuss the “product life cycle” below

Still more Demand Determinants ¡ Consumer expectations l l If consumers learn that the price will soon go up, the demand will shift rightward. If consumers learn that the “new model” is coming out soon, the demand for the existing model will shift leftward.

Contrast this with: Changes in Quantity Demanded ¡ Changes in quantity demanded: l l This is just moving up and down the existing demand curve. The demand curve itself doesn’t shift.