Changes in Demand

Consumers are difficult to understand. Our demands change, constantly and often. As a consumer with 32 years of experience, I can honestly say ‘Good luck trying to figure ME out, Suppliers!’. On behalf of all consumers the world over, one thing is certain – if THEY are willing to lower the price, then WE will buy a higher quantity of the product. I’d love to have more video games, but they’re $60 each, so all I can afford, without the wife strangling me with the joystick cord, is 2 per year. If they lower the price to $30 each, then I could easily afford 4 per year. If they raised the price to $90, i’d only buy one per year. Graphically, it would look something like this:

As you can see, my demand is what it is, but I will buy more at lower prices. That’s the law of demand.

BUT, let’s say something happens and all of a sudden I just start to buy twice as many video games at the current price? Did the suppliers just get lucky? Did my wife suddenly lose her mind? NO, my demand itself changed at ALL prices.

I will call this effect FRIPP, because it helps me remember it. What in the FRIPPIN’ FRIPP is FRIPP?? Well, it’s a simple acronym for changes in demand.

It stands for Future expectations, Related goods, Incomes, Preferences, and Population. These 5 determinants can change my demand without any change to the price.

Future expectations are our predictions about what may happen that may cause us to want to stockpile a product, or buy less, depending on the outlook. If things start going bad for me at work, and I am worried I might lose my job, I will stop buying nonessential items, such as video games, even at lower prices.

Related goods means that the price has changed for complementary or substitute products. If the price of Xbox games goes down, then the demand for Playstation games goes down. If the price of electricity goes way up, I will have to play less video games.

Incomes rise and fall. If I got a raise at work, I might have more real income leftover which I could use to buy more video games. In times of recession, our incomes will be lower, so the demand for home video gaming will go down. However, I would probably go to an arcade and spend a few quarters to play an inferior video game instead.

Preferences are based on influences around us, such as advertising, or even weather. If I moved to a warmer climate, I would prefer to spend more time outside, so I wouldn’t want to buy video games. If I read an article about how video games can help my daughter learn the alphabet, I would buy more. Or, maybe I just lost interest in video games, with no reason necessary. I’m 32!

Population size, income, or age composition of the market can also effect demand. Mostly it will effect market demand. If there was a large boom of baby boys born 12 years previously, then all of a sudden a large new crop of consumers has suddenly opened their eyes to video games, and  caused a huge increase in the market demand. My individual demand was much higher when I was 12 too, and if I had an income I would have bought a LOT more of them (there’s a reason 12 year old boys can’t have credit cards!).

A shift in market demand can also cause a change in price. If the market demand goes up, the suppliers will likely raise the price they sell for, and vice versa. For example, if a news report claimed that video games can help elderly people stay mentally active, then the market demand will increase (displayed graphically as a rightward shift). Suppliers will take note that people are buying more games, and will likely cause an increase in the price, because they can. They don’t care if the games are helping the elderly, but they know they can sell it now at a higher price.

Game On!

I’ve been playing video games since I was a kid. I’ve rescued Princess Zelda numerous times. That’s why I couldn’t wait to tell my wife that I would not be able to clean the garage this weekend, because I had to play video games for school.

I had a look at the suggested titles, Farmersi and McDonalds, and decided that McDonalds was more appealing to me. Farmersi, with it’s bland yellow interface and complicated rules, seemed far too difficult to learn in the time allotted. The McDonalds game has inviting colorful graphics, humorous text, and cute characters, but exploring the interface revealed a lot of depth and challenge.

The game allows you to run the entire McDonalds enterprise from 4 perspectives that interact simultaneously and mimic the major facets of the real McDonalds operations. The areas are the pastures, the slaughterhouse, the restaurant, and the corporate HQ. Changes to one area have various side effects to others, just like in real life. For instance, if you neglect your pastures, they will become toxic, and begin producing sick cows in the slaughterhouse. If you neglect to euthanize these sick cows, the tainted meat will make it’s way to the restaurant. Selling tainted meat to customers will make your customers sick, and they will boycott your restaurant, which means no more sales.

You begin the game with $50000 in cash, and 100 burger patties, which I will assume is the intital investment of capital, and you are now beholden to the investors to make them some money to pay them interest (I assume they are being paid, considering the fancy suits they wear in the boardroom). Your other factors of production are the pastures (land) which you pay rent on, and the labour of your workers, whom you pay wages to. The player is the factor of enterprise, and the decision they make represent the risks and efforts involved in the pursuit of profit. Profit will allow you to continue playing the game, and that is your payment.

My first attempt was a dismal failure. My instinct was to fully staff my restaurant, and sell the initial burgers. Once I had that going, I went to my pastures to see about keeping the flow of raw burgers coming into the restaurant. I built 3 pastures, and 3 soy fields to feed my cows. Returning to my restaurant revealed that my burger supply was nearly depleted, and there was no shortage of customers in line. The boardroom was happy because the cash register was dinging nonstop. And then it stopped. I was out of burgers, and my cash was low. Where were the burger patties for me to sell? Apparently I had neglected the needs of the slaughterhouse, and failed to notice the cows did not have enough food. They were keeling over and dying in pairs, and the food was just not there to sustain the ones that survived. The soy fields are harvested just once a year, so filling the cistern to feed the cows is more important than I thought. Plus, I had the sad duty of having to manually put down cows who had become sick. Their big sad eyes stared into my guilty conscience as I put them down. It didn’t take long for the boardroom to recognize my incompetence, and I was summarily dismissed by Rotten Ronnie himself.  

My subsequent attempts to turn a profit were far more successful. I scaled back my desire to expand too quickly, and instead spent conservatively on minimal staff, and a single soy and pasture field. This allowed me to focus on creating a level of operating that didn’t demand me to be in 3 places at once. It also allowed me to let the game tell me when it was time to expand. When I found that my restaurant was being supplied with a decent amount of patties, and the customers were still waiting in line, I decided it was time to hire another cashier and cook. Profits were on the rise. However, burger supplies were beginning to dwindle, so it was time to think about increasing production in the pastures. By adding more cows and soy, I was now becoming busier and busier, and stretched a little thin, but the board was happy. And then came the enviro-freaks to derail the profit-train. Apparently they didn’t like that I was raising beef cows in a fragile eco-system, and threatened to boycott. I didn’t know what to do, because I was finally making money, and I didn’t want it to stop. How much damage could a bunch of hippies cause to my stellar thriving business? Apparently, a lot. They called on customers to boycott us. All of a sudden, my demand had taken a massive drop. The lines of customers dried up, and my restaurant staff were just standing around. The burgers from the slaughterhouse were piling up. I had to scale back my production, and fast, because my pastures were costing me money. I didn’t have the option of lowering my price.

Eventually I ran out of money, but I did last until 2010, and was able to generate profit for a brief time. The game is actually a real brain teaser. It makes you think about what effect your actions (or inactions) will have on the other facets of the business, all the while making sure your costs are less than your revenue. When the revenue slows down, you have to proactively think about what you can live without in order to keep business going. If the game had the option of allowing the player to manipulate the price in order to increase quantity demanded, it might have been a bit more interesting. I think the main lessons I learned would be, first, be careful with your opening capital. Spending that money on expanding too soon can really create more costs than you will be able to handle once the capital runs out. Instead, focus on spending the money conservatively, focusing on initial operations, and only expand your ability to supply once the demand increases. Secondly, planning is by far the most important strategy. The pause button will give you the opportunity to stop time, and go from section to section and really think about what needs improvement, and what should be left alone. What you must bear in mind is how your decisions will affect other departments. Opportunity costs come into play because you must think of what you must give up in order to add something else. If you give yourself ample time to really weigh the options and risks, you will last much longer than if you just jump in and go go go.

Now, if you’ll excuse me, I’m going to go try again!

Production Possibilities

I’m building a house in Okotoks, so I’m faced with numerous decisions. Not only is the new house costing me money, but I am also going to have to commute to my job in downtown Calgary. I have 2 choices with the commute. I can either take public transit, which would be a low cost but a less desirable option in my opinion. I would much prefer the Okotoks commuter bus, because I can study on the way to and from work in comfort. However, the commuter bus is far more expensive. I figure that if I scale back on some of the upgrades on my house, I can reduce my monthly mortgage cost by up to $400…..at the obvious cost of some of the finer upgrades to my new house. Let’s be honest, the upgrades are for my wife, so if I tell her we have to scale back the beauty of the house, you better believe that I’m going to hear about it! As you can see I’m faced with decisions, so I’m forced to consider what I am giving up against the option I choose. Would I prefer to have study time on the bus, but have to deal with my wife complaining that the house isn’t perfect, or do I upgrade the house now at the expense of my study time on the bus?

The reality of life is that we can’t have everything we want because resources are limited, and economics is a study of how people and firms make choices with this ever present scarcity looming. A production possibility curve is a model used to compare the opportunity costs of decisions by displaying the possible outputs of two goods over an equal period of time. You could go to any point in the curve and see what the possible outputs would be and easily compare the cost of one good’s output would be against another. When two items have an absolute even value then the curve will be a straight line. The Law of Increasing Costs will give the curve a bowed out shaped because as more of a single item is produced, it’s single unit cost of production increases. This is due to the fact that all of the resources and capital goods used to create a certain good may not be particularly suited to produce a different good, so the cost of production will go up as factories are forced to, for example, produce apples using orange trees. Obviously, that’s impossible, so if you must produce more apples, they’re going to have to come from somewhere, such as importing them, which will carry an increase in cost.

A possibilities curve is also based on the assumption that all conditions are favorable. If the output falls directly on the border of the curve, this would indicate a fully employed workforce, the best possible technology is being used, and all possible efficiencies are being utilized. If any of these assumptions are not met, then the output will fall somewhere on the inside of the curve. A factory with a full work force that uses outdated machinery is still able to produce goods, but obviously not going to be operating to full potential unless they upgrade their machinery. Output combinations outside of the curve are unattainable.  The border can expand or contract based on increases or decreases in the employment rate, technology, or efficiencies available in the separate industries the goods fall under, so what was once unattainable can become attainable in time.

Making the right decision when faced with scarcity is an important part of life, so a possibility curve can be an invaluable tool, especially in business. A model or a graph can be a great way to get a high level view of all the possible outcomes. As for my decision, I presented the possibility curve to my wife, and she presented me with a look of extreme disapproval….so it looks like I’ll be riding public transit, but I’ll get to go home to a fully upgraded house and a happy wife.  I can now appreciate what I can have, because I understand what I gave up.

I've never blogged before!

This is my first time blogging. Hopefully I can use it to not only complete my assignments for my ECON-250 course, but also make it interesting at the same time.