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Economics

[[Economics Lectures|Economics]]

Outline of Lecture:

Second Lecture – Supply and Demand

 

<br>II. Supply and Demand

I. Introduction

[[Introduction]]

We’ve had our first introduction to economics and are ready explore the topic in greater detail.  Remember that this course is about the purchase and sale of goods and services in free enterprise.  By “free enterprise” I mean business transactions with little or no government interference.

We’ve had our first introduction to economics and are ready explore the topic in greater detail.  Remember that this course is about the purchase and sale of goods and services in free enterprise.  By “free enterprise” I mean business transactions with little or no government interference.

Today we will discuss this important principle of economics and many of the surrounding issues.   

Today we will discuss this important principle of economics and many of the surrounding issues.   

II. Supply and Demand

==Supply and Demand==

For any given good or service, there is a supply and demand.  The supply consists of quantity and price.  The price has enormous influence over the quantity.  No company can afford to build cars to sell at a price of only $1.  But at a sales price of $30,000, a vast number of cars can be built.  The cause is price, and the effect is quantity.

For any given good or service, there is a supply and demand.  The supply consists of quantity and price.  The price has enormous influence over the quantity.  No company can afford to build cars to sell at a price of only $1.  But at a sales price of $30,000, a vast number of cars can be built.  The cause is price, and the effect is quantity.

Can you interpret that?  When the supply curve shifted downward as supply increased, the price decreased but the quantity increased.  The new equilibrium is at lower price and greater quantity than before.  Consumers are happier as supply increases.  The discovery of new oil reserves, or inventions like the cotton gin, make consumers better off.

Can you interpret that?  When the supply curve shifted downward as supply increased, the price decreased but the quantity increased.  The new equilibrium is at lower price and greater quantity than before.  Consumers are happier as supply increases.  The discovery of new oil reserves, or inventions like the cotton gin, make consumers better off.

III. Equilibrium & Information

==Equilibrium & Information==

Consider these three basic principles of economics:

===Consider these three basic principles of economics:===

I. When demand exceeds supply at a given price, the price tends to rise. Likewise, when supply exceeds demand, the price tends to decrease.  

# When demand exceeds supply at a given price, the price tends to rise. Likewise, when supply exceeds demand, the price tends to decrease.  

II. A rise in price tends to increase supply and decrease demand. Conversely a fall in price tends to decrease supply and increase demand.  

# A rise in price tends to increase supply and decrease demand. Conversely a fall in price tends to decrease supply and increase demand.  

III. Price tends to move towards the amount at which the quantity in demand is equal to the quantity in supply: SUPPLY EQUALS DEMAND.

# Price tends to move towards the amount at which the quantity in demand is equal to the quantity in supply: SUPPLY EQUALS DEMAND.

Note the use of the verb “tend” in the laws of economics cited above.  Companies that consistently lose money “tend” to go bankrupt and out of business.  But it does not happen immediately, especially if the company is large.  It takes time for the market to come to equilibrium.  Ultimately supply does equal demand, but only after enough time and activity passes for the conditions to attain equilibrium.

Note the use of the verb “tend” in the laws of economics cited above.  Companies that consistently lose money “tend” to go bankrupt and out of business.  But it does not happen immediately, especially if the company is large.  It takes time for the market to come to equilibrium.  Ultimately supply does equal demand, but only after enough time and activity passes for the conditions to attain equilibrium.

Governmental regulations require some of these disclosures.  This may be the best and only effective type of governmental regulation.  Food packaging now must state what the ingredients are and how much fat is contained.  The buyer doesn’t have to guess about this information.  The buyer must still beware, but can do so with more information than before.

Governmental regulations require some of these disclosures.  This may be the best and only effective type of governmental regulation.  Food packaging now must state what the ingredients are and how much fat is contained.  The buyer doesn’t have to guess about this information.  The buyer must still beware, but can do so with more information than before.

IV. Price Discrimination

==Price Discrimination==

The term “price discrimination” sounds ugly, but it means selling the same good or service at different prices to different people.  It is an attempt by a seller to capture additional money from buyers who are willing to pay more.

The term “price discrimination” sounds ugly, but it means selling the same good or service at different prices to different people.  It is an attempt by a seller to capture additional money from buyers who are willing to pay more.

The airline wants to sell the same seat at a price low enough for the tourist to pay, and then at a different, much higher price for the businessmen.  This is price discrimination, because it distinguishes or discriminates based on who the buyer is.  “Perfect price discrimination” sells each unit of a good at the maximum amount each individual buyer is willing to pay.

The airline wants to sell the same seat at a price low enough for the tourist to pay, and then at a different, much higher price for the businessmen.  This is price discrimination, because it distinguishes or discriminates based on who the buyer is.  “Perfect price discrimination” sells each unit of a good at the maximum amount each individual buyer is willing to pay.

There are laws against price discrimination, but most sellers find clever ways to do it anyway.  Airlines distinguished between business customers and tourists by its “Saturday night stay-over” rule.  If the traveler reserves the return flight to include staying over at least one Saturday night, then he is likely a tourist.  If he flies out and back in the same week without staying through the weekend, then he is likely a businessman.  So the airline tickets were then priced much more cheaply for those who stay over at least one Saturday night.

There are laws against price discrimination, but most sellers find clever ways to do it anyway.  Airlines distinguished between business customers and tourists by its “Saturday night stay-over” rule.  If the traveller reserves the return flight to include staying over at least one Saturday night, then he is likely a tourist.  If he flies out and back in the same week without staying through the weekend, then he is likely a businessman.  So the airline tickets were then priced much more cheaply for those who stay over at least one Saturday night.

In general, price discrimination depends on the existence of obstacles to prevent buyers from reselling their goods to other buyers.  If the same good is sold at $X to person A and $Y to person B, and X<Y, then person A could buy an extra good and sell it to person B at less than $Y.  The price discrimination would collapse due to the resale market.

In general, price discrimination depends on the existence of obstacles to prevent buyers from reselling their goods to other buyers.  If the same good is sold at $X to person A and $Y to person B, and X<Y, then person A could buy an extra good and sell it to person B at less than $Y.  The price discrimination would collapse due to the resale market.

But some goods cannot be resold.  Goods that are personal to the buyer, like a tailored suit or dress, cannot be resold.  Price discrimination works fine for personalized goods or exclusive markets, because there is not a resale market to destroy the discrimination.

But some goods cannot be resold.  Goods that are personal to the buyer, like a tailored suit or dress, cannot be resold.  Price discrimination works fine for personalized goods or exclusive markets, because there is not a resale market to destroy the discrimination.

   

   

V. Minimum Wage and Price Controls

==Minimum Wage and Price Controls==

So far we have been talking about economic exchanges in the absence of government controls.  But the government does interfere in many ways in our economy.  America enjoys more free enterprise than any other large country, but we are still heavily regulated.

So far we have been talking about economic exchanges in the absence of government controls.  But the government does interfere in many ways in our economy.  America enjoys more free enterprise than any other large country, but we are still heavily regulated.

Moreover, illegal aliens find a wage of even $2 an hour better than what they could make in their homeland.  Companies move operations offshore to take advantage of places that do not have minimum wages as high as ours.  Alternatively, workers enter this country illegally to work at low wages and displace American workers, according to several lawsuits.

Moreover, illegal aliens find a wage of even $2 an hour better than what they could make in their homeland.  Companies move operations offshore to take advantage of places that do not have minimum wages as high as ours.  Alternatively, workers enter this country illegally to work at low wages and displace American workers, according to several lawsuits.

   

   

VI. Socialized Medicine

==Socialized Medicine==

The single biggest industry in the United States is health care, and it is sharply increasing in expenditures each year.  It has three major components: government-controlled (Medicare and Medicaid), insurance-controlled, and private pay or uninsured.  Each year, the demands for the government to take over the field grow louder, as insurance costs skyrocket.

The single biggest industry in the United States is health care, and it is sharply increasing in expenditures each year.  It has three major components: government-controlled (Medicare and Medicaid), insurance-controlled, and private pay or uninsured.  Each year, the demands for the government to take over the field grow louder, as insurance costs sky-rocket.

Most other countries have some form of socialized medicine.  In the countries of Canada, North Korea and Cuba, it is actually illegal to pay money to a doctor simply to see you.  The government control there is so great that you can only see a doctor paid by the government in those countries.  In England, there is a two-tiered system: good care is provided to those who can afford to pay for it, and free but inferior care is provided by the government to those who cannot.

Most other countries have some form of socialized medicine.  In the countries of Canada, North Korea and Cuba, it is actually illegal to pay money to a doctor simply to see you.  The government control there is so great that you can only see a doctor paid by the government in those countries.  In England, there is a two-tiered system: good care is provided to those who can afford to pay for it, and free but inferior care is provided by the government to those who cannot.

In the United States, where health care still includes free enterprise, a patient can enter a doctor’s office or hospital at any time and receive services based on a promise to pay for them by check or cash.  Prices vary, and it is worth shopping around.  Immediate care always remains available at some price.

In the United States, where health care still includes free enterprise, a patient can enter a doctor’s office or hospital at any time and receive services based on a promise to pay for them by check or cash.  Prices vary, and it is worth shopping around.  Immediate care always remains available at some price.

   

   

VII. Assignment.

==Assignment==

Read, and reread, the lecture.  Complete the homework assignments through the level in which you choose to enroll in this course:

Read, and reread, the lecture.  Complete the homework assignments through the level in which you choose to enrol in this course:

Introductory:  1. In a free market, the price and quantity at which goods are sold are where __________ equals ___________.

Introductory:  1. In a free market, the price and quantity at which goods are sold are where __________ equals ___________.

Honors:  Write an essay of about 300 words total on one or more of the following topics:

Honors:  Write an essay of about 300 words total on one or more of the following topics:

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11. “Economic theory of law and the public domain - When is Piracy Economically Desirable?” See http://lexnet.bravepages.com/media1.html

 

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== Links ==

== Links ==