Identify two microeconomics and two macroeconomics principles or concepts from the simulation/ video. Explain why you have categorized these selected principles or concepts as microeconomics or macroeconomics.
The main concepts displayed in the video are the law of supply and law of demand. These concepts are common to microeconomics and macroeconomics. Law of supply is a positive relationship between quantity of goods and services and its price. When price of a good rises, the quantity supplied of the good increases accordingly. With much higher price producers are willing to supply more goods and services. Law of demand depicts negative relationship between price and quantity demanded. When price of a good rises, the quantity demanded of a good decrease. Consumers buy less of a product when price goes up for particular good.
In microeconomics supply and demand represent the decision-making and choices of single households and firms, whereas in macroeconomics supply and demand is the decision-making regarding inflation, unemployment, economic growth on a national level. However, the macroeconomic variables can be reduced to microeconomic variables, since they are derived based on the microeconomic theory (Nelson, 1984). In macroeconomics the decisions of single households and firms are aggregated and present supply and demand of whole society in general.
Identify at least one shift of the supply curve and one shift of the demand curve in the simulation/video.
In the simulation video, 2 shifts in demand curve and 3 shifts in supply curve were presented. If price changes, it leads to movements along the supply and demand curves.
Generally, shift in demand is caused by consumer choices, which are formed based on income level, expectations, and by comparing the prices of relative goods. The changes in income and prices of substitutes are positively related to demand curve, as if income or prices of substitutes increase, the demand curve shifts to the right. In contrast, prices of compliments are negatively related.
Technological improvements, change in the size of production, weather conditions, supply shocks, changes in the cost of production and impacts of national policies may all cause shifts in supply curve. Overall, supply curve shifts with the change in the size of production.
Explain what causes the shifts, and how each shift affects the price, quantity and decision-making.
Consumer preferences were impacted by the study, which revealed that apples have a cancer-preventive function. People’s incentives change towards consuming more apples, to stay healthy and in order to prevent themselves from cancer. As a result, demand curve shifts to the right. Price for apples and quantity demanded in the market increases.
Below are the examples of shifts in the supply curve displayed in the simulation video:
Technological improvement: new disease resistant apples were introduced into the market. This invention changes the incentives of producers towards planting more of new type of apples. With increase in production size, supply curve for disease-resistant apples shifts to the right. The price for apples decreases and quantity produced increases.
Decrease in input quantity: As with its effect on demand, advertising campaign of pear cider changes the incentives of producers. If the price of pears is higher on the market, producing firms may prefer to grow fewer apples, but more pears. With the decrease in the size of input (apples), the market for apple cider shrinks. The supply curve for apple cider shifts to the left.
Rise in cost of production: as wage is one of the costs of production, the demand by apple pickers’ union to increase wages makes production of apples expensive. With increase in wages, producers receive fewer profit margins. As a result, supply curve shifts to the left. Price of apples rise and quantity supplied decrease.
How might you apply what you learned about supply and demand from the simulation/video to your workplace or your understanding of a real-world product with which you are familiar?
For example, the world known beverage Pepsi Co. With the help of understanding supply and demand, it is possible to predict market price of the drink. New advertising campaign of Coca Cola, can distort sales of Pepsi Co, because Coca Cola is major competitor in beverage market. In contrast, promos on Lays chips, can increase quantity demanded, if to consider Lays as a complement good. If scientists prove that Pepsi leads to obesity or other forms of diseases, then people who prefer healthy eating habits will stop consuming Pepsi. The supply can be affected if one of the manufacturing factories shut down, or input materials become expensive.
How do the concepts of microeconomics help you understand the factors that affect shifts in supply and demand on equilibrium price and quantity? How do the concepts of macroeconomics help you understand the factors that affect shifts in supply and demand on equilibrium price and quantity?
Consumer choice theory is a microeconomic concept that helps to understand shifts in demand, which is the desire of purchasers for particular good or service. Consumer preferences affect demand curve in various ways, such as if people change their tastes, quantity demanded can increase or decrease. Another concept is scarcity. Because of scarce resources, people are required to make tradeoffs, and allocate their resources accordingly. For example, with limited income and price rise of a product X, people will prefer buying cheaper goods to product X, as income is limited (budget constraint).
Macroeconomic concept such as factors of production helps to understand the shift in supply curve. Factors of production or inputs (land, labour, capital) are the main determinants of production size. With increase in the cost of production, production size for particular good may shrink. This cycle affects the supply curve and causes shifts in the supply.
As economic theory suggests market corrects itself via price mechanism. Surplus and shortage in the market will be avoided with the help of supply and demand. The price will rise and fall unless the market is in a equilibrium.
How does the price elasticity of demand affect a consumer’s purchasing and pricing strategy as it relates to the simulation/video?
Price elasticity of demand is the percentage change in quantity demanded occurred as a result of 1% change in price. It is the calculation, by which firms determine the level of consumer’s sensitivity for a price change. The price elasticity of demand is negative, since according to the law of demand quantity has adverse relationship to price. The demand for good or service can be inelastic or elastic, where the concepts refer to price insensitive and sensitive customers respectively. Availability of close substitutes, time horizon (short-run or long-run), inferior good or normal good characteristics determine whether the good is price elastic or inelastic (Baumol et al, 2006). Moreover, price elasticity may vary across nations, location or even income-level. For example, fresh vegetables are considered to be a luxury product for low-income families and a requisite product for high-income families (Leser, 1954). This means that low-income families are price-elastic; whereas high-income families are price-inelastic (they will buy fresh vegetables on any price, since they consider it as a necessity). Taking into account the price elasticity, firms can set optimum pricing level, so that to keep existing customers and not to distort sales.
References
Baumol, W., & Blinder, A. (2006). Chapter 6. Demand and Elasticity. In Microeconomics: Principles and policy (10th ed.). Mason, OH: Thomson/South-Western.
Leser, C. E. (1954). The Measurement of Elasticities of Demand. Applied Statistics, 3(2), 74. doi:10.2307/2985519
Nelson, A. (1984). Some Issues Surrounding the Reduction of Macroeconomics to Microeconomics. Philosophy of Science, 51(4), 573-594. doi:10.1086/289206
