Changes

A "free market" is one where there is no interference with price and quantity of goods sold.  Government does not regulate the price in a free market, or limit the quantity.  If there is a wage and price control imposed by government, then it is not a free market.  Some of the "global warming" legislation, such as the proposed "cap and trade," would limit the supply of energy and thus would not result in a free market.  But most of this course assumes we are in a free market.

A "free market" is one where there is no interference with price and quantity of goods sold.  Government does not regulate the price in a free market, or limit the quantity.  If there is a wage and price control imposed by government, then it is not a free market.  Some of the "global warming" legislation, such as the proposed "cap and trade," would limit the supply of energy and thus would not result in a free market.  But most of this course assumes we are in a free market.

In a free market, and after enough time passes and information is exchanged to reach equilibrium, supply equals demand for both price and quantity sold.  That is one of the beauties of free enterprise.  It is efficient, productive and generates little economic waste.  If every good and service stayed at equilibrium, then we could end the course right now.

In a free market, supply equals demand for both price and quantity sold.  That is one of the beauties of free enterprise.  It is efficient, productive and minimizes waste.  The supply and demand reacts almost immediately to changing needs and circumstances.  The free market reacts much more quickly than government can.  For example, government offices like the Post Office close at 4:30 or 5pm, but the free market is always working 24 hours a day.

But we are not so fortunate.  Prices do change daily.  During your next few trips to the supermarket, notice how much the prices fluctuate.  This is because both supply and demand are always changing.  Supply changes due to problems or improvements in manufacturing and shipping.  Labor costs change over time, which also affects supply.  Demand is constantly fluctuating also.  Every day people lose or change jobs, which affects their buying decisions.  The changing of the seasons also affects demand, as do alterations in personal tastes.

Prices change daily due to continual changes in supply and demand.  During your next few trips to the supermarket, notice how much the prices fluctuate.  This is because both supply and demand are constantly changing.  Supply changes due to problems or improvements in manufacturing and shipping, or different yields in crops.  Labor costs change over time, which also affects supply.  Demand is constantly fluctuating also.  Every day people lose or switch jobs, which affects their buying decisions.  The changing of the seasons also affects demand, as do variations in personal tastes.

Five to ten years ago there was tremendous demand for Beanie Babies, driving up the price.  Now there is far less demand, so the price has fallen.  The same could be said about any fad.

Five to ten years ago there was tremendous demand for Beanie Babies, driving up the price.  Now there is far less demand, so the price has fallen.  The same could be said about any fad.

Greed also plays a role.  The suppliers of goods and services would like to increase their prices without losing sales, so that they can make more money.  Before Wal-Mart made price-cutting so popular, it was routine for suppliers to increase their prices every year.  Everyone expected it.

Greed also plays a role.  The suppliers of goods and services would like to increase their prices without losing sales, so that they can make more money.  Before Wal-Mart made price-cutting so popular, it was routine for suppliers to increase their prices every year.  Everyone expected it.

Imagine yourself as president of a company that makes widgets, and you are having a meeting to discuss your product.  Inevitably an employee suggests increasing the price on the widget so that the company will make more money.  People who have never studied economics think that increasing the price will always result in increased revenue from sales (Price x Quantity sold).

Imagine yourself as president of a company that makes "widgets" (a "widget" is an imaginary good), and you are having a meeting to discuss your product.  Inevitably an employee suggests increasing the price on the widget so that the company will make more money.  People who have never studied economics think that increasing the price will always result in increased revenue from sales, because revenue is price times quantity sold.  If quantity sold is constant, then increasing the price should have the effect of increasing the revenue from sales.

But suppose you have an employee who had taken this economics course in your meeting.  He or she points out that an increase in price will reduce the demand, because the demand curve is usually downward sloping.  You will sell fewer goods if you raise the price.

But suppose you have an employee who had taken this economics course in your meeting.  He or she points out that an increase in price will reduce the demand, because the demand curve is usually downward sloping.  You will sell fewer goods if you raise the price: your "quantity sold" will decrease if in you increase your price, and your overall revenue may decrease too.

You then ask, “how much fewer sales?” If sales decline by a smaller percentage than the price increased, then overall revenue (Price times quantity sold) will increase.  If, however, sales decline by a larger percentage than the price increased, then overall revenue will decline.

<discuss economics and the future, but how little value the very distant future has; compare with how politics is about the short-term future also>

As owner, you then ask, “how much fewer sales will result if I increase the price?”  If sales decline by a smaller percentage than the price increased, then overall revenue (price times quantity sold) will increase.  If, however, sales decline by a larger percentage than the price increased, then overall revenue will decline.

==Price Elasticity of Demand==

==Price Elasticity of Demand==