Case Study Law Of Demand And Demand
The last point we want to make about the market demand curve
is that it is the horizontal sum of the individual demand curves.
That's bout a mouthful and a mindful, so let me repeat that.
The market demand curve is the horizontal sum of the individual demand curves.
Why do we want to know this?
It is very useful particularly from a marketing point of view.
To understand how a single market demand curve comes from
the very many different tastes and preferences of individual consumers.
Let's turn now to the supply curve.
It depends, perhaps most obviously, on the firm's ability to produce.
They transform factors of production like raw
materials and labor and capital into consumable goods.
However supply also depends on the individual's decisions
to supply the factors of production to begin with.
That's why later on, we'll spend a whole part of this
course just studying how wages and rents and interest
rates are set in the labor, land, and capital markets.
Now, does your corn flake supply curve look like this?
Again, did you label your axes correctly?
I'll bug you about this.
Because I've found that students often forgot to label
not only their axes, but the curves, as well.
More often that not, this leads to confusion.
So, always label everything in your graphs and you will be way ahead of the game.
Anyway, in this figure, firms will produce
no corn flakes at all if the price is only one
but they will produce 18 million boxes if the price is five.
The implication then of an upward sloping supply curve is that
the lower the price, ceteris paribus, less units firms will produce.
And the higher the price, holding other
things constant, the more firms will produce.
This is the law of supply.
As with demand curves, there likewise are
shift factors that influence the supply curve.
One of hte most important is technology.
Suppose your company comes up with a
new cost-saving computerized process for making cornflakes.
What do you think will happen to the supply curve?
It would shift outwards, meaning that for a
given price, say at point b, supply increases.
This is a change in supply, and remember, this is different
from a movement along the supply curve from a change in price.
Now how about another shift factor. Input prices.
Suppose the price of labor or
raw materials increases for corn flakes manufacturers.
What happens now to the supply curve?
It shifts inward so you supply less at a given price.
Still a third important shift factor is government policy.
This can be a very big cost factor for businesses.
For example if the government imposes stricter
environmental regulations, manufacturers will see their cost rise.
And the supply curve will shift inwards.
While such regulations will improve the quality of the
air and water, they will also make goods more expensive.
Such regulations as well as others for health and safety, may even put domestic
producers of things like, say, automobiles and
steel, at a disadvantage to foreign competitors.
Adversely, if Congress removes tariffs and quotas on, say, the auto
industry, the supply curve will shift outward as auto imports increase.
This table summarizes the major shift factors
using the automobile industry as an example.
Each of these shift factors will cause a shift in supply.
Whereas a change in price causes a movement along the supply curve.
Please study this table carefully before advancing to presentation.
The law of demand posits a negative relationship between the price of a good and quantity demanded if all other factors are held constant. This cornerstone of microeconomics explains that consumers of a good or service will consume more if the price is lower. In reference to popular graphical representations of demand, the law of demand indicates movement along a demand curve rather than a shift in the demand curve. A shift in the demand curve results from a change in income level or changes to the prices of substitute goods.
Pricing and Promotion Based on Law of Demand
Sellers of consumer products base pricing and promotional strategy on the law of demand. According to a 2012 report by the Food Marketing Institute, over half of grocery customers in the United States were willing to accept living with less in response to difficult economic conditions. Grocery customers implicitly would prefer to consume more but are limited by price. Promotional grocery pricing frequently offers discounted prices on the condition that a certain number of items are purchased. The existence and success of this promotional pricing model exemplifies consumer willingness to purchase higher quantities at lower prices.
Auto fuel consumption has an inelastic component, though people alter non-essential driving habits if gasoline prices become too high. Gasoline prices in the U.S. rose significantly in the second half of 2011, with national average prices approaching $4 per gallon. Though gasoline consumption had been falling since the start of the 2008 recession due to reduced expected income, the trend accelerated in response to the high prices in late 2011. This effect was especially clear in California, where fuel prices were among the highest in the country. Controlling for the effects of changing incomes, rising gasoline prices caused consumers to demand a lower quantity of that good.
Price Decrease Can Increase Demand
Consider a hypothetical scenario in which tickets for a sporting event are being sold by scalpers on the secondary market. Suppose the scalpers expect the game will be highly attended and are charging $200 per ticket. For many people, this price point is too high to justify. As the start of the game approaches, the scalpers realize they were wrong about projected attendance. The quantity demanded at $200 is not sufficient to sell out the game. The ticket price on the secondary market drops to $50, and more people are willing to meet this price to see the game. The change occurred because the price level was altered by ticket suppliers, and consumers responded to a change in price only.
Suppose the game had sold out at $200, but it was announced shortly before game time that the star player would miss the game due to injury. If interest in the game declined as a result, causing the existing ticket holders to sell tickets at a discounted price, this would represent a shift in the demand curve. Both the ticket price and quantity demanded would decline due to external factors. This alternative scenario is not an example of the law of demand. (For related reading, see: Are there any exceptions to the law of demand?)