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Line 2: − − Demand is determined by price. Generally, the higher the price for a particular good, the lower the quantity demanded. Conversely, as technological advances cause reduction in prices, the quantity demanded increases. Far more people own computers today than when they were first introduced over twenty years ago. Why? One reason is because computers are cheaper today. − − Let’s examine the price of a good. Does the amount you have to pay for a good at a given time tell the whole story about its price? Is its true price simply the number of dollars and cents demanded by the seller? − − Not exactly. It is a bit more complicated than that. The relative price of a good is more important than its isolated price. When you go into a store to shop, you compare prices of different goods before choosing the one you like. Premium gasoline may look a good deal until the customer sees that regular gasoline is selling for 12 cents less. − − The real price of a good is its opportunity cost. Recall what the opportunity cost is: it is the value of the best forgone alternative. When someone buys something for $10, the real cost is the best alternative use of that $10. The real price of watching television for one hour is value of that time if you had spent it in the best way possible. The price is thus not $0. The real price of that hour of television watching is your highest hourly wage if you worked, or your future wages made possible by studying now. − − Defining real price in terms of opportunity cost avoids the havoc that inflation causes with prices. Back in the late 1970s, inflation was more than 10% per year. What cost $10 one year would cost $11 the next year, and over $12 in the third year. If a good kept the same price during those three years, then its opportunity cost and real price actually decreased. Think about that. − − Economists created something called the “Consumer Price Index,” or CPI, to measure changes in basic prices of many goods over time. It looks at the typical purchases by urban (not farming) families and monitors the change in prices of those goods and services from month-to-month. It includes the costs of food, beverages, housing, clothes, transportation, medical care, recreation, education, and even services like haircuts. It then combines all those values into one number. To make it easier to compare, the values are combined in a way that the CPI for the period 1982-84 averaged “100". In January 2004, the CPI was 185.2. You can view all the CPI numbers going back nearly a hundred years on the internet.<ref>ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt</ref> In July 2009, the CPI was 215.351. Inflation causes it to go higher and higher, as the government prints more and more dollars and cause them to lose their value. − − By comparing a change in price of a good to the change in the CPI, you can tell whether the real price of the good is becoming more or less expensive. If the good’s price increases by less than the CPI’s increase, then the good has a real price that is falling.
moving material
In this course we have covered the supply and demand curves, and examined the economic concept of “elasticity”. Now we turn to focus solely on “demand”.
In this course we have covered the supply and demand curves, and examined the economic concept of “elasticity”. Now we turn to focus solely on “demand”.
The sensitivity of the quantity demanded to a change in price is measured by the elasticity, which we discussed in the last lecture. This time, we are going to focus on other aspects of “demand”.
The sensitivity of the quantity demanded to a change in price is measured by the elasticity, which we discussed in the last lecture. This time, we are going to focus on other aspects of “demand”.
== Example: the NBA Draft ==
== Example: the NBA Draft ==