Excerpt from Chapter Three, A Capitalist Manifesto, by Gary Wolfram

Transcription

1 Excerpt from Chapter Three, A Capitalist Manifesto, by Gary Wolfram INDIVIDUAL DEMAND The demand of any individual for a good or service is a schedule of how much he would be willing to purchase at various prices. We can think of the situation where an auctioneer surveys you and asks how many pairs of shoes you would be willing to purchase if the price of each pair were $90, $85, $80, and so on. By listing the prices and the amount you would be willing to purchase, we would generate your demand for shoes. If we were to draw a picture of this relationship, it would look like Figure 3-4. There are a few things we should notice right away. First, the demand is given at and for a certain point in time. We might ask how many pairs a week you would buy, how many pairs a year, how many pairs a decade, etc. Thus we would have to make a distinction between short-run and long run demand for shoes. refers to the entire schedule of prices and quantities that the individual would be willing to purchase at those prices. In terms of the graph, it is the entire demand curve. Quantity demanded is how much an individual is willing to purchase at a particular price. Notice that changing the price does not change the demand curve; changing the price changes quantity demanded. This is a mistake often made in the media. You will hear in a news story that the price of oil is rising and therefore demand is falling. This demonstrates that the news commentator does not understand the concept of market demand very well. If the price of oil rises, the demand for oil remains the same, but the quantity demanded of oil falls. So what changes demand? Variables we have held constant when we surveyed our consumer and

2 asked him how much of a good he would be willing to buy at various prices. These variables include complementary goods. references influence the demand curve. Economists normally take the preferences of the individual as given when examining demand. Of course, an entire industry is made up of folks who attempt to change your preferences. Advertising is a good example. You are told that a certain automobile will get you a date, or make you seem younger, or that a certain beer is less filling than any other beer. This type of advertising attempts to make you willing to purchase more of the product at the same price. In terms of our diagram, it means that at every price, you are willing to buy more shoes than you were before watching the advertisement. This is shown by shifting the demand curve to the right, as from D to Da in Figure 3-5. A second variable affecting demand is satisfaction given certain constraints. While there are a number of constraints for each of us our time, our ability to perform certain physical activities, etc. in the simplest model, the constraint is income. Each of us has a limited amount of income, usually expressed in terms of money. Given the amount of money we have, we go out and make our purchases. The more money we have, the more purchases we can make and the greater amount of satisfaction we can obtain. If we are altruistic, we may use some of our income to gain satisfaction by giving money to our friends or to certain charities. In any event, the amount of a typical good or service we are willing to purchase at a given price will increase or decrease as Normal goods are defined as goods that we demand more of as our income rises. For example, we demand more housing services as our income rises. We thus find wealthier people purchasing greater amounts of housing services than poor people, especially in the form of larger, fancier homes. Many goods and services have the characteristic that, given a particular price for the good, we would purchase more of it if we had more income.

3 An inferior good is a good that we purchase less of as our income rises. This usually occurs because we stop buying the good in question, or reduce our consumption of it, and use another good. For example, hot dogs could be an inferior good for an individual. Suppose you earn $300 month as a paid intern. You might find yourself purchasing a lot of hot dogs given your budget constraint. Then you get a regular job that pays $900 per month. Even though your taste for hot dogs has not changed, if we find that you purchase fewer hot dogs when your income goes up, then hot dogs are an inferior good for you. In our diagram this would be shown by a shift in your demand curve to the left, as from D to Da in Figure 3-6. Notice that a shift to the left means that at each price you would purchase fewer hot dogs than you would before your income rose. The third thing affecting the demand curve is the price of substitutes. If you were asked how many cans of applesauce you would be willing to buy at various prices, your answer would surely depend on the price of canned peaches or whatever other item you might eat instead. Suppose we have mapped out your demand for canned applesauce, and then the price of canned peaches falls from $0.70 to $0.40. how many cans of applesauce you would purchase at the various prices. It would be reasonable to find that you buy less applesauce than you would have before the price of peaches dropped. Of course, this is precisely what the sellers of canned peaches hope for when they lower their price. You are wandering down the aisle and put the applesauce in your cart. When you notice that there is a sale on peaches, you throw a few cans of peaches in your cart and take out the applesauce. Figure 3-7 shows the situation of substitutes affecting demand. Suppose the price of peaches falls from $0.70 to $0.40. You will buy more peaches than before, but you will now buy fewer cans of applesauce at every price of applesauce, since applesauce and peaches are substitutes. The fall in the price of peaches causes your demand for applesauce to shift to the left. This is shown in Figure 3-7.

4 The fourth and final category of those things affecting the demand curve is complements. Two goods are complements if when the price of one of the goods rises, the demand for the other good falls. Goods are also called complements if when the price of one good falls, the demand for the other good increases. Going back to our hot dog example, hot dogs and hot dog buns might be two such goods. Suppose we determine your demand for hot dog buns. You would be willing to buy three packages a week at $1 a package, four packages a week at $0.75 a package, five packages at $0.50 a package, and so on. This is represented by D in Figure 3-8. Now suppose the price of hot dogs rises from $1.25 to $3.50 per package. This moves you up your demand curve for hot dogs, decreasing the quantity demanded of hot dogs. But now that you are buying fewer hot dogs, you will want to buy fewer hot dog buns. Thus, at every price for hot dog buns we will find that you want to buy fewer hot dog buns than you did before the price of hot dogs changed. Your demand for hot dog buns has declined, and the demand curve shifts to the left. This effect of the price of a good (in this case, hot dogs) on the demand for its complement (hot dog buns) is represented in Figure 3-8 by a shift in demand from D to Da.

5 To summarize what has been said so far: The demand of an individual for a product is how much that individual would be willing to buy of that product at various prices. The quantity demanded increases as the price falls, so that the demand curve, which graphically shows the individual demand, slopes down. other goods, in particular, prices of substitutes and complements. Changes in any of these causes the demand to change, represented by the demand curve shifting to the left or right.