econ5

5.1 Introduction

• Carrie Underwood's debut album "Some Hearts" (2005)

  • Fastest-selling debut country album in history

  • Sold nearly 315,000 copies within three weeks

  • Best-selling country album by a female singer for three years

  • Over 6 million copies sold in the U.S. by 2008.

• Underwood's journey to stardom:

  • Dreamed of being a singer but prioritized college.

  • Auditioned for American Idol in 2004, winning in 2005.

  • Transitioned from unknown to star, completing her degree and touring.

• Teenagers contribute significantly to the demand for music.

Demand

• Demand: Quantity of a good/service consumers are willing and able to buy at various prices.

• Law of Demand: As the price of a good/service increases, demand decreases, and vice versa.

• Substitute Goods: Products that satisfy the same want (example: tea and coffee).

• Complementary Goods: Products consumed jointly (example: printers and ink cartridges).

Supply

• Supply: Quantity of a good/service producers are willing and able to sell at various prices.

• Law of Supply: As the price increases, supply increases, and vice versa.

• Revenue: Total money received by a business (calculated as quantity sold multiplied by price).

• Elasticity: Measures the responsiveness of quantity demanded/supplied to a price change.

5.2 How Do Demand and Price Interact?

• Consumer decisions depend on willingness and ability to purchase.

• Example: Shopping for Some Hearts at different prices influences buying decisions.

• Quantity Demanded: The amount of a good/service consumers are willing to buy at a specific price.

• Demand is expressed over a time period (e.g., 315,000 copies sold in three weeks).

Using a Demand Schedule for Estimates

• Example: Tyler's demand for tacos at various prices:

  • $0.50: 11 tacos

  • $3.00: 1 taco

• A demand curve illustrates the relationship between price and quantity demanded.

• Demand curves can be straight or curved, showing that quantity demanded varies with price changes.

5.3 What Can Cause Demand to Change?

• Shifts in Demand: Sometimes demand changes at all prices due to external factors (e.g., events boosting consumer interest).

• Factors affecting demand:

  • Consumer income

  • Number of consumers

  • Consumer tastes/preferences

  • Consumer expectations (future price changes)

  • Price of substitute goods

  • Price of complementary goods

Changes in Market Demand

• Increases or decreases in demand reflect shifts in curves right (increase) or left (decrease).

• Law of Demand: More quantity demanded at lower prices, less at higher prices.

5.4 How Do Supply and Price Interact?

• Producers decide on quantity supplied based on price.

• For example, Jasmine's taco supply:

  • Supplying 300 tacos at $1.00, 500 tacos at $3.00.

• Quantity Supplied: Amount of a good/service made available at a specific price.

• Market supply reflects the total of what all producers supply across prices.

• The Law of Supply means quantity supplied moves in the same direction as price.

5.5 What Can Cause Supply to Change?

• Supply can change due to factors other than price:

  • Changes in costs of production

  • Number of producers in the market

  • External conditions (natural disasters, technology)

• Supply curves shift similar to demand curves but show how overall supply changes at multiple prices.

Supply Shifters

• Factors affecting supply shifts:

  • Input costs

  • Number of suppliers

  • Conditions from catastrophic events

  • Technological advances

  • Producer expectations (future prices)

  • Government policies (subsidies, taxes)

5.6 What Is Demand Elasticity?

• Elasticity: Degree to which quantity demanded/supplied changes in response to price.

• Demand elasticity illustrates consumer sensitivity to price changes.

• Elastic Demand vs. Inelastic Demand:

  • Elastic: Sensitive to price changes (example: energy bars)

  • Inelastic: Less sensitive (example: toothpaste)

• Elasticity can be calculated:

  • Formula:demand elasticity = % change in quantity demanded / % change in price

• Total Revenue Test: Measures demand elasticity based on revenue changes with price changes.

5.7 What Is Supply Elasticity?

• Supply elasticity measures producer responses to price changes.

• Similar to demand, but focuses on how much producers adjust supply.

• Elasticity of supply formula:

  • supply elasticity = % change in quantity supplied / % change in price

• Factors influencing supply elasticity include:

  • Availability of inputs

  • Mobility of inputs

  • Storage capacity

• Elastic vs. Inelastic Supply: Yogurt (elastic) vs. antiques (inelastic).

Conclusion

• Key forces in market economies: Demand and Supply.

• Changes in price influence both consumer purchasing and producer supply behavior.

• Understanding elasticity aids producers in making informed pricing and production decisions.