Class 28 – Demand Change and Elasticity

Today we talked about what affects market demand. Comparative statics are what things impact the amount of a good we buy.

To move up and down the demand curve: price changes. (change quantity demand).

To move the demand curve (shift whole demand curve left or right):

            Changes in income – more income doesn’t mean you consume more.

            Price of other things change

            Expectations change – what the future predicts about demand impacts us today

            Tastes change – preferences change

            Number of participants

Normal goods – income increases = quantity demand increases

Inferior goods – income increases = quantity demand decreases

Substitute goods – price of good X increases – demand for good Y increases

Compliment goods – price of good X increases – price for good Y increases

Quantity demand is defined as how much of a good we consume as a function of our ability/willinness to buy it.

Elasticity:

When the law of demand seems to not apply.

Elastic - consumption is VERY responsive to change in price

Inelastic - consumption is NOT that responsive to change in price

We measure this using Own Price Elasticity of Demand:

m=%change in quantity demanded / %change in price.

If m =2, and price increases by 10% then you consume 20% less.

Class 26 - Transaction Costs and Demand

Transaction costs = stop beneficial transactions. Middlemen have the comparative advantage to lower transaction costs – able to bring consumers/producers together. Supermarkets are middlemen. Price is higher but consumers don’t have to travel all the way to factories or farms. Middlemen exchange property rights. They bridge barriers between transaction costs and get rich.

Demand

Demand is a relationship between the amount of something you wish to get and the sacrifices needed to get it.

We moderate this when circumstances change.

This is not an all or nothing concept. It is not a marginal concept.

People specialize and don’t resort to self-sufficiency because we live in a large, impersonal world. Exchange can occur in small communities.

Problems in a huge world = information problems and transaction costs.

The price is information – signals to buyers/sellers about costs and values. The knowledge and resources allow order to emerge.

Quantity demand is a number. It’s the amount of a good that buyers are willing and able to consume at a particular price.

Law of Demand = other things equal. The quantity demanded good falls when price rises. We buy less when things get expensive.

Markets are any group of buyers and sellers. It is any unorganized, decentralized interaction between buyers and sellers. This causes 1 of 2 things to emerge: money prices or non-money prices (education/healthcare/etc). Markets blend the 2 and get order.

Buyers = demanders. In goods markets, the demanders are households and in factor markets the demanders are firms.

Sellers = suppliers. In a goods market, the suppliers are the firms and in goods markets they are the households.