Demand doesn’t affect me...does it?

Have you ever wondered why the price of something such as gasoline has risen over the years?  Is it from the taxes imposed?  The oil tycoons in OPEC or all those protesters?  Or could it possibly be because the world demand for oil and gas has risen over the years?

Demand affects the prices of items just as much as supply does.  The more you like it (preference), the more money you make (income), the price of a similar product, the prospect of future prices, income or availability; and the size of the market or income and age distribution in the area all affect demand.

For example, if you really prefer to wash your dishes with knitted dishcloths.  Using the knitted dishcloths would be your preference.  Depending on your income, perhaps you could purchase the wool and make them yourself (as this could cost less money).  Maybe you could purchase inexpensive other dishcloths at another store or maybe you wish to splurge on this item.  Perhaps you find out that there is a wool shortage in the world and this will affect the producers’ ability to create the dishcloths at the same price.  Maybe the market where you purchase these dishcloths has an influx of people who also enjoy the dishcloths or maybe more people move into the market area that really enjoys using the same dishcloths.  All of these factors would affect the demand of the knitted dishcloths in various ways which may also lead to the price changing in order to reach equilibrium.

On the graph below, I have illustrated how an increase in demand will affect the equilibrium price.  Notice in Demand 1 (D1) that the equilibrium price was $3.50 with the quantity demanded and the quantity supplied of 48.  With Demand 2 (D2) the equilibrium price is now $4.00 with a demand and supply of 54.  An increase in demand will lead to a higher price and a higher supply provided.

So next time you are purchasing a good or using a service (such as electricity) and you notice the price is a certain way, you can evaluate how the demand for this good or service has affected the price of the item and how to prepare for the future demand.

Tara’s Tips for Managing a Business

Should I Buy or Should I Sell Now?

Knowing when to buy or sell depends on the current state of the market.  Being able to identify the supply available and the current market price of the item you wish to purchase will assist with this decision.  When deciding on whether or not to buy an input to create an output, you will also need to have an idea of what the demand for the output will be.

Production Decisions in a Mixed Economy

As a business you need to study the market to determine what to make, for whom and how much you will make.  You can determine how much of the product to make by deciding what you want to make and for whom you plan to sell the product to.  By studying the market, you can determine what current supply and demand for the product and determine how the market will be affected if you were to begin producing the same product.

When Money Is Tight and Times are Hard

When money and resources are scarce, it may be a better choice to develop your product through knowledge, maintenance, etc.  Even though it may seem that the business is not moving forward, the knowledge and maintenance you put into your business provide larger payoffs in the future.

To Increase Demand and Supply of Your Products

In order to increase demand for your product, you should determine the equilibrium price which is the price at which a consumer is willing and able to purchase the item and the producer is willing and able to sell at.  When you are at the equilibrium price, there will be no shortages or surpluses of the product.

Tips for the game:

I would recommend building your foundation by purchasing land.  Next, watch the two top sellers on the market. I recommend purchasing the top selling item first and supplementing with the second highest selling item.  My decisions were then based on how the market was faring locally and determined if I should explore exporting some items.  I attempted to keep my herd and crops to a decent size then halfway through the game I began acquiring knowledge and additional resources to maintain my business.  In the end, I watched the prices and made adjustments as required in order to create the biggest profit.  I didn’t do the best at this game; however, following these simple tips, I was able to increase my farms value from previous games.

Production Possibilities

The graphs in Chapter 1 represent the outputs created from specific inputs.  They illustrate the attainable and unattainable areas for production as well as the opportunity costs for increasing or decreasing production of outputs.  As resources are scarce, only a certain amount of output A or output B can be produced at any given time.  This choice is illustrated by the different points along the graph which depict the number of each output that can be produced using the same number of inputs.  Opportunity cost is determined by what is given up as a result of making the choice to produce one output over another.

I am constantly facing choices with my business which is a crafting business.  I need to decide what to make with the materials I have in order to receive the most profit.  I need to take into consideration the amount of material an item may use to make, the amount of time is required for creating the item, how much the item will sell for as well as what the demand for the item is. 

The most significant opportunity cost I have faced since returning to school is the amount of time I have to work on my business.  The time I am able to spend with my family remains unchanged as my children are only awake for a certain period of time and my business is usually completed during the evening while they are asleep.  School is now taking the place of the time I spend on my business and therefore my output will decrease; however, the return of completing all of my classes will be a higher rate of pay and more opportunities at my workplace.