Of Demand and Supply and Tickle Me Elmo
Demand
How
many six pack of Coca-Cola will people buy each month at a price of $3? What if
the price is $2? What if the price increases to $6? The answer shows the
relationship between the price of Coca-Cola and the quantity demanded. Such
relationship is called the demand for Coca-Cola. Demand can be defined as a
relation between the price of a good and the quantity that consumers are
willing and able to buy per period, with other things being constant.
The Law of Demand
The
law of demand states that the quantity demanded varies inversely with price, other things constant. Thus, the
higher the price, the smaller the quantity demanded; the lower the price, the
greater the quantity demanded (Sloman et al, 2012).
Demand, Wants and Needs
Consumers
demand and wants are not the same. Wants are unlimited however economic
resources such as labor, capital and natural resources are limited. Hence, not
all wants and needs can be fulfilled. For example, you may want a new Audi R8,
but the $179,645 price tag is likely beyond your budget. Nor is demand the same
as need. You may need new speakers for your car, but a price of $200 is too
high for you. However, if the price drops to $100 then you will become both
willing and able to buy one.
The Income and
Substitution Effect of a Price Change
Economist
has identified two important components that cause a change in price. First,
when the price of a good rises, the money that a consumer has allocated has a
lower purchasing power. So, the rise in price has made the consumer budget to
decrease indirectly although it is not actually decreased. The way the consumer
responds to this change of purchasing power is referred to as the income
effect.
Secondly,
when the price of a good rises, given the purchasing power is constant, the
amount of another good that the consumer must sacrifice to acquire one unit of
good increases. For example, if McDonald’s chicken nugget cost $1 and a large
Coca-Cola cost $0.50, then each chicken nugget “cost” ½ of Coca-Cola.
Now,
if the dollar price of Coca-Cola rises to $1, consumer must now give up 1
chicken nugget to purchase each Coca-Cola. With the substitution effect, the
consumer is taking into account the new relative prices, switches between goods
to keep level of satisfaction unchanged (Miller, 2010).
The Demand Schedule and Demand Curve
a)
Demand Schedule
Point
|
Price per Chicken Burger ($)
|
Quantity Demanded per Week
(millions)
|
a
|
15
|
8
|
b
|
12
|
14
|
c
|
9
|
20
|
d
|
6
|
26
|
e
|
3
|
32
|
b)
Demand Curve
At
point a, price per chicken burger is $15 and the quantity demanded per week is
8 million. At point b, price per chicken burger is $12 and the quantity
demanded is 14 million. At point c, price per chicken burger is $9 and the
quantity demanded per week is 20 million. Whereas at point d, price per chicken
burger is $6 and the quantity demanded by consumers per week is 26 million. At
point e, price per chicken burger is $3 and quantity demanded per week is 32
million. The demand curve slops downwards from left to right reflecting the law
of demand which is price and quantity demanded are inversely related.
Shifts of the Demand Curve
A
demand curve isolates the relation between the price of a good and quantity
demanded when other factors that could affect the demand remained unchanged.
Change in Consumer Income
Exhibit
2 shows the market demand curve for chicken burger. This demand curve assumes a
given level of income. Increase in income shifts the demand
curve to the right from D to D1 because a consumer will be willing
and able to buy more chicken burgers at each price, so the quantity demanded
will increase. For example, at a price of $12, the amount of demand for chicken
burgers increases from 14 million (point g) to 20 million (point h) per week.
Changes
in Consumer Expectations
A
change in consumers’ income expectations can shift the demand curve. For
example, a consumer who is going to get a pay raise might increase demand
before the raise takes effect. Similarly, a change in consumers’ price
expectations can shift the demand curve. For example, if speculations are made
that housing prices were to increase next month, current demand for housing
will increase, shifting this month’s demand for housing rightward.
Changes in Consumer Tastes
If
the preference for a particular good increases, the demand curve for that good
shifts to the right. For example, a discovery that tomato sauce and cheese on
chicken burgers promotes healthy eating habits could change consumers’
preferences, shifting the demand curve for chicken burgers rightwards.
Supply
Think
about the iPhone 4 that came out last year. When it was first released, many
people were waiting in queues to purchase the product. So, large amount were
being produced and the prices were able to be maintained very high because they
were being sold out like hot cakes. As the hype over the iPhone diminished, a
lesser amount need to be produced. Hence, the price will eventually fall
(Sowell, 2011). Supply can be defined as a relationship between the price of a
good and the quantity that producers are willing and able to produce per
period, other things constant.
Law of Supply
The
law of supply states that the quantity supplied is usually directly related to
its price, creating a positive relationship. Thus, as price decreases, quantity
supplied decreases; as price increases, the quantity supplied also decreases.
Shifts of the Supply Curve
The supply curve isolates the
relation between price of a good and the quantity supplied when the other
factors that could affect the supply remained unchanged.
Changes
in Technology
An increase in technology shifts the
supply curve to the right. Technology can be defined as a cost-reducing
innovation. Technological advancements allow firms to produce a product at a
lower cost. For example, if a new high fryer that costs the same as existing fryer
fries chicken burgers in half the time. This could cause a shift in the market
supply curve rightwards.
Changes
in the Number of Producers
Market supply depends on the number
of producers in the market. As the number of producers increases, supply will
increase, shifting the supply curve to the right. For example, the of number of
gourmet coffee bars increased more than quadrupled in the United States since
1990 (think Starbucks), shifting the supply curve to the right (Shjarback,
2011).
Changes
in Producers Expectations
Changes in producer expectations can
shift the supply curve. For example, a burger maker expecting higher burger
prices in the future may expand the burger shop now, shifting the supply curve
of burgers rightward.
Application of Demand and Supply in Real Life Situations
Tickle Me Elmo
Tickle Me Elmo is a plush Elmo doll
that giggles and says "That tickles!" when his belly is squeezed. Produced
by Tyco in 1996, Tickle Me Elmo became that year's hottest and must-have toy
during the holiday season. On Black Friday, Tickle Me Elmo sold out of stores
within two hours. Tyco, which had originally predicted to sell 400,000 Tickle
Me Elmos, could not keep up with the demand, despite continuing to ship new
product from their factories in Asia throughout the Christmas season. Tyco reportedly
sold over a million Tickle Me Elmo dolls by Christmas, and over 5 million
between 1996 and 1997 (Oloffson, 2010).
News reports of trampled store
clerks and fights erupting over the last doll in the store were not uncommon. A
Wal-Mart employee at New Jersey was tackled by 300 customers while holding back
the stores last remaining Elmo, and suffered a broken rib and concussion. A
black market was quickly created in classified ads and internet, and there were
reports of parents spending hundreds of dollars on the toy, which originally
retailed at $29.99. In fact, on eBay this little guy was on sale for $5,000
(Silverstein, 2006). According to Jim Silver, editor in chief and co-publisher
of Toy Wishes Magazine, "Nobody's really getting hurt because it's all
about supply and demand, and if someone wants something bad enough and is
willing to pay more for it then they have a right to do so."
Reference List
Dosi,
G. and Nelson, R. (1994) An introduction to evolutionary theories in economics.
Journal of Evolutionary Economics,
4(2), pp. 153.
McEachern,
W.A. (2009) Economic Principles: A
Contemporary Introduction. 8th ed. United States: South-Western
Cengage Learning.
Miller, P.
(2010). Income and Substitution Effect of a Price Change. Econ 406 Supplement [online]. Available from: http://krypton.mnsu.edu/~millep1/econ406/misc/Income%20and%20Substitution%20Effects%20Explained.pdf. [Accessed on 31 May 2013].
Oloffson,
K. (2010) From Tickle Me Elmo to
Squinkies: Top 10 Toy Crazes. Available from: http://www.time.com/time/specials/packages/article/0,28804,1947621_1947626_1947641,00.html. [Accessed on 5 June 2013].
Shjarback,
J. (2011) Supply and demand of Starbucks coffee during economic recession. Business, Marketing & Technology Blog
[blog]. 9 August 2011. Available from: http://jeffshjarback.blogspot.com/2011/08/supply-and-demand-of-starbucks-coffee.html. [Accessed on 2 June 2013].
Silverstein,
J. (2006) Tickle Me Elmos Selling for
$5,000. Available from: http://abcnews.go.com/Technology/story?id=2583572&page=1#.UbGMvdjKXSp. [Accessed on 1 June 2013].
Sloman,
J., Wride, A., Garrat, D. (2012) Economics.
8th ed. Edinburgh Gate: Pearson Education Limited.
Sowell,
T. (2010) Basic Economics: A Common Sense
Guide to the Economy. New York: Basic Books.
Sowell,
T. (2011) Economic Facts and Fallacies.
2nd ed. New York: Basic Books.
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