Ch. 6 Prices Powerpoint

Supply & Demand Scenarios

Supply & Demand Scenarios

A major step toward mastering the economic way of thinking is learning to reason in terms of supply and demand. On the questions below, your answers are less important than the reasoning with which you arrive at those answers. Use the economic reasoning skills you have acquired in this class to consider the following issues. Begin by considering the current situation as described in the problem. What effect will the change have on the price and the quantity demanded in the market?

Situation 1: Roses are red, violets are blue;

1. Using supply and demand analysis, explain why the price of roses always seems to rise just before Valentines Day.

2. Suppose a freeze killed one-half of the rose crop just before Valentines Day; how would this effect the price of roses? Why?

3.What would happen in the market for fine chocolates if one-half of the rose crop freezes?Why?

Situation 2: A story on the front page of The Wall Street Journal on October 22, 1996, told about troubles in the Bob Evans

Restaurants. The Bob Evans chain, which started as a truckers’ diner in the late 1940s, currently includes 380 restaurants with annual sales of more than $800 million. However, at the annual shareholders meeting disappointment and anger were the order of the day and the meeting focused on reported declines in the quality of food and service, and on the declining price of the company’s stock. In searching for an explanation for the plight of the Bob Evans chain, the Journal noted that, rising hog prices combined with Americans’ healthier eating habits have stalled sales of fried foods

and meat products, which account for almost 25% of the company’s revenue.

1. Use your understanding of supply and demand to analyze the impact of the conditions described in the statistic at the end of the article summary. Which issues effect demand? Which issues effect supply?

2. Has the quantity of food demanded by consumers declined over the last year? How will that affect the supply provided by the restaurant this year? Will these changes affect the menu prices?

Situation 3: Two years ago the city of Denver had an initiative on the general election ballot that asked voters to raise Denver’s minimum wage to 40% above the national minimum wage.

1. How would things in Denver have changed if it had passed? (What would be the same? What would be different?)

2. Predict the effect of this legislation on market(s) for labor in Denver, in the suburbs, and outside of the metropolitan area.

3.Where would you rather work (in Denver or the suburbs)? Where would you be most likely to get a job, in or out of the city?

4. Your uncle Charlie is thinking about opening a small restaurant in Denver or the surrounding suburbs. Where would you advise him to open his restaurant, in Denver or in one of the suburbs? Why?

Situation 4: Many local governments around the nation are concerned with the problem of teenage smoking. A wide variety of legislation has been passed with the intent of reducing sales of cigarettes to minors. Methods currently in use include: a.) Requiring a picture ID before purchase; b.) Banning cigarette machines in public access areas—moving cigarette

machines behind the counter in bars and restaurants; c.) Fining underage purchasers of cigarettes; d.) Fining those who sell cigarettes to minors.

1. Analyze the above options in terms of their cost of each protective measure. (What is the cost and who bears it?)

Predict the impact of each option on the demand, supply, and price in the market for cigarettes. 2.What is the difference in market impacts of fining the buyer vs. fining the seller of cigarettes?

Situation 5: The Dutch city of Amsterdam has had effective rent control since the Second World War. Despite its considerable charm, Amsterdam has many decaying and burned-out buildings. This is surprising, since everyone agrees that there is a severe housing shortage in Amsterdam. Tinje is a woman who lives in a rent-controlled apartment building facing a canal. A few years ago Tinje paid a plumber to install a shower in her apartment after years of futile requests to her landlord for a shower. If she leaves the apartment (which she is unlikely to do), she expects to charge the incoming tenant for the shower.

1.What is meant by a "shortage" of housing? Can you illustrate a shortage situation on the supply and demand graph below?

2. Using supply-demand analysis, can you give a plausible reason why Tinje’s landlord would be so unresponsive to her requests for a shower? Why didn’t Tinje just move rather than paying for the shower herself?

3. Can supply, demand, and price analysis help to explain why there are a number of decaying and burned-out buildings in Amsterdam? Why?

Situation 6: Suppose you run a lawn mowing business: you charge $15 per lawn and you can mow five lawns in an eight-hour day. You currently have more people asking you to mow their lawns than you can satisfy so you are considering hiring someone to help. Your other option is to buy or rent a riding lawn mower that will enable you to mow seven lawns each

day. You find that your friend Jim, a good worker, will work for $8 per hour or you can rent a riding mower for $100 per week plus $25 for gas and oil. You estimate that you can sign up an additional 25 customers.

1. Should you hire Jim or rent the mower and do the work yourself? Which would be more profitable?

2.What if the mower enabled you to mow eight lawns per day, would your decision be the same?

Creative Destruction

Creative Destruction

1. In a free market, what happens if a price is too high, a product doesn’t work, or service is lousy?

2. Why do you think Mr. Cheung started making more things for the tourist trade?

3. What motivated telecom companies to bring cell phones to developing countries? Did they know about the difficulties faced by boat drivers, butchers, and egg farmers?

4. How does the rapid rollout of cell phone technology illustrate Adam Smith’s principle of

the “invisible hand”?

5. Who benefits from new technologies like cell phones? Who loses out?

6. Should government have banned cell phones in order to protect the jobs of people who made and repaired landline phones? Why?

7. “Many would say that this [cell phone technology] revolution did more to give the average person power and to reduce poverty than any government program.” Do you agree? Why/why not?

8. If goods and services can be improved or made at lower cost, does it matter whether the cause is technology or trade?

9. Rather than trying to preserve obsolete jobs, what are some other ways we could help workers whose skills are no longer in demand?

10. Why does competition lead to inequality of outcome? Is that a bad thing?

11. What examples are given in the video to show that the average person – not just the rich person – is better off now than 25 years ago? Name 2 other examples?

12. What are some of the ways in which poor households in the U.S. are better off now than the average household was in the 1970s?

Why is Turkey Cheaper.......

When you do your Thanksgiving shopping this week, you will encounter two vastly different options for the centerpiece: an expensive heritage, organic, antibiotic-free, freshly killed turkey; or a relatively cheap, mass-produced, rock-solid-frozen bird. The frozen birds are a pretty attractive deal — especially because this time of year, they are unusually cheap. According to government data, frozen whole-turkey prices drop significantly every November; over the last decade, retail prices have fallen an average of 9 percent between October and November.         

That trend seems to defy Econ 101. Think back to those simple supply-and-demand curves from introductory micro, and you’ll probably remember that when the demand curve shifts outward, prices should rise. That’s why Major League Baseball tickets get most expensive during the World Series — games that (theoretically, anyway) many more people want to see. Similarly, airline tickets spike around Christmas.

But the retail prices of other products nosedive right as demand is at its highest. Take, for example, television sets on the Friday after Thanksgiving — shopping demand is already high, and stores up the ante by offering door-buster discounts. The price for avocados falls ahead of Super Bowl Sunday and Cinco de Mayo and, at least in some markets, tuna prices fall during Lent. This is puzzling to economists, and there are lots of competing theories to explain the phenomenon.

A useful way to understand it is this: Frozen turkeys are (probably) like TVs; fresh turkeys are like roses (maybe).

The most intuitive and popular explanation for a high-demand price dip is that retailers are selling “loss leaders.” Stores advertise very low prices — sometimes even lower than they paid their wholesalers — for big-ticket, attention-grabbing products in order to get people in the door, in the hope that they buy lots of other stuff. You might get your turkey for a song, but then you also buy potatoes, cranberries and pies at the same supermarket — all at regular (or higher) markups. Likewise, Target offers a big discount on select TVs on Friday, which will ideally entice shoppers to come in and buy clothes, gifts and other Christmas knickknacks on that frenzy-fueled trip.

That is the supply-side explanation of what’s going on. But plenty of economists disagree, and argue that it’s actually demand-side forces — changing consumer preferences — that drive these price drops.

Consumers might get more price-sensitive during periods of peak demand and do more comparison-shopping, so stores have to drop their prices if they want to capture sales. Perhaps, during the holidays, the composition of consumers changes; maybe only rich people or people who really love turkey buy it in July, but just about everybody — including lower-income, price sensitive shoppers — buys it in November. Or maybe everyone becomes more price-sensitive in November because they’re cooking for a lot of other people, not just their nuclear families.

“People are a little less picky about what they’re buying for other people,” explains Judith Chevalier, an economics professor at the Yale School of Management. “Let’s say I prefer Coke over Pepsi. If I’m buying for myself, I’ll probably buy Coke even if it’s more expensive. But if I’m buying soda for a party, I have no reason to think everyone else also prefers Coke, so I’ll go with whichever brand is cheaper.”

One paper looking at canned-tuna prices argued that this kind of brand substitution was the primary case for an overall decline in price during Lent. It turns out that the cheapest tuna brands aren’t significantly discounted during Lent, but because the cheap brands temporarily accounted for a much higher share of overall sales, they dragged down the average price of a can of tuna.

But not all highly seasonal goods get cheaper at peak demand. Consider, for example, roses in mid-February.

It’s not your imagination: Roses are indeed most expensive around Valentine’s Day. In a survey of about 300 florists, the Society of American Florists, an industry group, found that the average price for a dozen arranged long-stemmed roses was $81 this past Valentine’s Day, compared with an everyday price of $63.

There are a few possible reasons why market forces are different for roses and frozen turkeys on their respective holidays. For one, the loss-leader strategy really only works if you’re a multiproduct retailer, says Chevalier. Florists sell only flowers; they’re not willing to take a loss on the one thing they sell in the hope that you’ll buy a bunch of other stuff, since you’re not likely to buy anything else.

More important, roses — like airline seats or World Series tickets — are what economists refer to as “supply inelastic.” It’s costly to ramp up rose production in time for peak demand, since the roses must all be picked (and for the most part, flown in from Colombia and Ecuador) in the single week preceding Valentine’s Day.

Meanwhile, turkey sellers start putting frozen birds into cold storage as early as January, so they can stockpile turkeys well ahead of the holiday surge. Fresh turkeys, on the other hand, are killed just in time for peak demand — like roses — which is part of the reason fresh birds are so much more expensive. Roses might resemble fresh turkeys for demand-side reasons too, as both are probably purchased disproportionately by higher-income, less price-sensitive shoppers.

They say sharing is the cornerstone of Thanksgiving. As long as enough of us share the same tastes and buying habits — particularly those of us who prefer low price-point, supply-elastic goods — perhaps most of us will continue to get pretty good deals on our holiday dinners.

Catherine Rampell is an economics reporter for The Times. Adam Davidson is off this week.

Free Trade Video Questions

Free Trade  (8 points each)

1. What is a free market?

2. Why did economist Milton Friedman travel to Hong Kong in 1980?

3. How was Hong Kong able to prosper despite its lack of natural resources?

4. Why was Hong Kong allowed economic freedom after World War II even though China became a communist country?

5. Besides material wealth, on what other quality of life measures did Hong Kong match Western countries by 1980?

6. What did Milton Friedman mean by an “atmosphere of incentive”?

7. GDP per capita is just a number. Why should we care if it increases? How does it affect the life of the average person?

8. Why has much of the world tried to follow Hong Kong’s example?

9. Why might some people see a free market economy as dog-eat-dog?  Why didn’t  Friedman see it this way?

10. What is voluntary association?

11. How do prices influence people’s actions?

12. If more people purchase tomatoes at their current price, how does that influence Ng Choi’s pricing decision?

13. How does the production of a pencil illustrate the “invisible hand” of the market?

Video Questions

From Poop to Profits

1.    What do the farmer and the bookstore owner have in common?

2.   What is an entrepreneur?

3.   What is innovation?  What does it have to do with entrepreneurship?

4.   What was the new product Brad Morgan developed?

5.   Why did Brad Morgan keep refining his product and process?

6.   “Do what you do best and trade for the rest.” Explain.

7.   What are the conditions that encourage entrepreneurship?

8.   Why do entrepreneurs need freedom?

9.   What would the world be like without entrepreneurs?

10.                     Can you think of an innovative product you could bring to the market, explain, if not, why not?

Article 1

Given what you have learned in class read the article “Electric vehicles in short supply” and give your assessment as to why the supply of electric vehicle is running low.  Cite specific examples that explain why this is occurring and describe why do you think the suppliers are behaving in this manner?  Finally, do you agree with the supplier’s actions, why or why not?

Electric vehicles in short supply

Lease-price war spurs a run on battery- powered cars. Some sell out in Southland.

June 05, 2013|Jerry Hirsch and Brian Thevenot

If you've been enticed by the recent spate of cheap lease deals on electric cars, good luck finding one.

Southern California dealers are seeing heavy demand for battery-powered cars, now leasing for as little as $199 a month. Fiat dealers have waiting lists for the new 500e even though the car hasn't hit their lots yet. And Honda dealers have already sold out of the Fit EV since a $259 lease was announced Thursday.

The reaction revealed pent-up demand for electric vehicles -- as long as the price is right.

Until recently, most consumers have rejected the cars at sticker prices that can be double those of gas-powered rivals, before $10,000 in state and federal incentives. But a lease-price war appears to have brought electric cars to a tipping point, engaging average consumers who shop on price in addition to eco-conscious buyers looking to make a statement.

Three electric-blue Fits sat gathering dust for about three months at Honda of Santa Monica -- until Saturday morning, when customers snapped them up and competed to get on a waiting list.

"It's incredible, especially since we haven't had any foot traffic or interest in the car in six months," said Jeff Fletcher, sales manager at Honda of Santa Monica. "I'm not even sure we'll have enough cars for the people on the waiting list."

It seems like a good problem for the automakers to have, but surging demand also puts them in an awkward position -- especially given the losses they'll take on the sale of every electric car because of high development costs. Honda and other automakers must now walk a fine line between limiting short-term losses and creating long-term goodwill in a fledgling market, said Jeremy Anwyl, vice chairman of auto information company Edmunds.com.

"This is basically a government-created marketplace," Anwyl said, referring to California rules that essentially mandate that automakers build zero-emission cars. "So you see car companies trying to limit their costs associated with meeting these mandates."

And yet Honda and others have a big marketing opportunity. "The idea that electric vehicles are desirable -- that would be a wonderful notion to get out in the marketplace," he said. "This is a fine balance."

Honda had plans to build just 1,100 Fit EVs in this model year and the next combined, releasing them in a trickle to select dealers in select states. It sold only 176 from its introduction in July through the end of May, according to Honda spokesman Chris Martin.

In addition to dropping the lease payment to $259 from $389, Honda eliminated an annual limit of 12,000 miles and threw in a free home-charging station. The lease also offers free maintenance and collision and vehicle theft coverage.

"The big question is, did they go overboard? You don't come up with offers like that unless you really need to," Anwyl said. Scott Shachter, an optometrist from Pismo Beach, started his futile search for a Fit EV on a visit to Los Angeles on Saturday. He hadn't the faintest notion of buying an electric car before reading about Honda's offer.

"It seemed like a no-brainer," he said. "My wife drives the kids around town in a Suburban. We spend about $500 a month in gas."

After surveying several dealers, Schachter has little hope of getting the car. "They don't have the supply, but they still put out this amazing deal. It's disappointing, but I'm not going to get too bent about it."

Vern Lindholm, by contrast, is quite bent about it. The retired business owner, who lives in Los Feliz, said he was told by Scott Robinson Honda in Torrance that he could come pick up his Fit EV on Sunday. Then he was told later, he said, that no cars were available.