Download Voc #3Vocabulary for Supply and Demand Lectures

Voc. 2 First Vocabulary from Supply and Demand Lectures ©Michael R. Dohan Fall, 2014
Exogenous and Endogenous Factors affecting demand and supply
1. The quantity demanded for a product, Qi, at any given price is mainly determined by its
own price Pi (which we treat as an endogenous factor within our “model”). We can
summarize the relationship between all the ”own prices” of a product and the quantity
demanded at each price in a demand function, (which we often just call “demand”) with only
its own price as the independent variable. Be sure to understand the difference between the
“quantity demanded at a specific price” and the more general term “demand”.
2. The quantity demanded usually goes up as the price goes down, partly because even though
the extra units give the buyer less benefit or utility, they also cost less relative to other goods.
(substitution effect) Also as prices go down, real income (money income/price level) goes
up which may increase (0r decrease) the demand for a good or service (income effect, see
below).
3. The quantity demanded, of course, is also determined by many other exogenous factors
outside our simple analytical model with one independent variable. which we are initially
going to hold constant (ceteris paribus = holding all other things constant). These
exogenous factors include:
4. Pj the prices of substitutes (buses vs cars, chicken vs beef, butter vs margarine, ink jets vs
laser jets).
5. Pk The prices of compliments of the good: ink for the ink jet printer, milk for cereal,
gasoline for cars and taxi cab drivers for taxis.
6. Incomes earned per year by the population in the market area. If incomes go up and the
demand for a product goes up, we call this product a normal good: the demand for dining
out, better clothes, travel. If incomes go up and the quantity demanded goes down, it is an
inferior good; examples are fatty hamburgers, traveling by bus, staying in cheap motels and
living in certain areas.
7. Wealth = assets minus liabilities equals net worth. Net worth on a particular day is a
measure of wealth. It can be analyzed in the same way as income.
8. The weather and climate are a major factor in the demand for some products from winter
coats or boots and travel to bathing suits and air conditioners and going to the beach.
9. The demographics of a market area (a word that summarizes the characteristics of a given
population, e.g. age and gender, to health, income, ethnicity, education…), clearly affect the
type and quantity demanded of products at any given price. For example, our aging
population demands more lifetime car facilities, hospices, geriatricians (doctors specializing
in the treatment of the elderly), special types foods, medicines, hospitals, and visiting nurses.
and specialized services such as elder hostel that organizes trips for senior citizens. This
group also enjoys golf instead of rock climbing, cross-country skiing instead of
snowboarding, elder hostelling instead of bicycle racing, RVs instead of tents. The music
industry is being hit by a slow down in the growth of the teen cohort as well as changing
tastes as the ethnicity of our population becomes more Hispanic and on top of technological
changes that has forced them to lower there prices. The study of the demographics of your
market area is a key factor in the success or failure of your business plan.
10. Technology change creates newer models which compete with older models (computer
processors, more gas efficient cars, airplanes versus passenger ships, or which provide
improved complementary inputs or services (4LTE for cell phones), wrinkle-free shirts (no
need for irons), new medicines or procedures.
11. Expectations about the future. People’s buying behavior depends very much on their goals
and expectations about the future. Couples wanting to buy a house will save more. If buyers
expect the price of a product to go up in the near future, they may rush out and buy it now. If
people think there is going to be a depression, they may try to save money in case they are
laid off. Sometimes behavior in response to expectations is self-fulfilling. Why?
12. Tastes, advertising, peer pressure, family structure, … In sum there are many factors that
affect the quantity demanded for a product at a given price but we are going to assume that
none of these change so that we look just at the price of the product and the quantity
demanded for that product at that price.
13. The Law of downward sloping demand. For most products, you will observe that if the
price of the product goes down, more is consumed (except where price is perceived as an
indicator of the quality of the good, so that when you go in; an ask the best of something, the
sales person will bring out the most expensive model.) Normally, if ice cream goes on sale,
you buy more. If fruit gets more expensive, you buy less. Why? There are two reasons.
14. Law of diminishing marginal utility. If you like chocolate and you are asked eat one
chocolate bar after another until you can eat no more, you will notice that your utility
(pleasure) from the first chocolate bar is quite high, for the second one it is a bit less, for the
third one, you may or may not eat it because you have become satiated. If I forced you to eat
a forth one you might actually get sick and I have caused the total utility of those chocolate
bars to go down. To general this, as you “consume” more of a product or a service, your
total utility probably goes up. Each additional until unit raised your total utility less and less
until it becomes zero or even negative. Think what this means about your willingness to pay
for chocolate. It the price of chocolate bars you might not buy any. At some price you will
buy one, at a lower price, you will buy two and if the third chocolate bar is free, you might
even refuse to eat it. In the language of an economist, this relationship between additional
consumption and addititional utility or benefit is called marginal utility from one extra unit
of the product. It is defined as the increase in the total utility divided by the increase in the
quantity of the product (usually one unit). It can be visualized as the slope of a tangent to the
total utility curve shown on below. Mathematically marginal utility abbreviated as MU =
TU/Q. As you understood intuitively above with our chocolate example, the marginal
utility gets smaller and smaller and smaller and you get more and more of the product. It is
analogous to the law of diminishing marginal product or return as we discussed in
Chapter 3.
15. Supply depends on the cost of inputs and the current stage of the appropriate
technology given the relative costs and skills and capability of the inputs, as well as the
innate shape of the production function (increasing or decreasing returns to scale within a
factory, or to an industry).
16. Supply functions in competitive industries are derived from marginal cost functions.
See later vocabulary list.