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Economics 12 Final Project: Microeconomics

Due date: May 21

Jacob Wharrie

on 21 May 2013

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Transcript of Economics 12 Final Project: Microeconomics

Economics 12 Final Project: Microeconomics By Jacob Wharrie (Blk 2) Increasing awareness of the economic and financial world and how it affects me as an individual.
Using this awareness to aid myself in financial, political and personal decisions after graduation.

In short, I want to prepare myself as a consumer and as a citizen. Ideas from opportunity cost to labour demand curves were discussed.
However there are two that I am fond of reiterating: #2: Elasticity of Demand About My Goals From watching the news about businesses and financial matters, and from witnessing the 2008 financial crisis transpire, I developed a yearning to understand these matters more.

So when we were made to write and share our economic goals at the start of the course, I had a clear idea on what I wish to gain from it. These included: Reflection on Inelastic Demand My Goals Microeconomic Concepts Sketches #1: Supply Supply is the quantities provided by a supplier at various prices within a period of time.
Any quantity sold at a specific price is called quantity supplied. The market supply, the overall supply in a market (not representing individual suppliers), can be presented in a supply schedule, a table containing various quantities supplied at specific prices. It can also be represented on a graph. A specific point on the curve represents a quantity supplied. The overall curve represents supply, which is directly related to the graph. This relationship can be explained using the Law of Supply: "The quantity supplied will increase if price increases, and fall if price falls under ceteris paribus (as long as other factors do not change)." Reason for the Direct Relationship:
Profit Maximization: As prices rise, producers are given the chance to cover production costs and gain more wealth by increasing quantities of supply available to sell under those prices. When supply moves "along the curve", the quantity supplied only changes. When the supply curve "shifts left or right", the entire curve moves.

Moving along the curve is simply due to price changes. A shift in the supply curve is caused by a number of reasons: Production costs: producers may need to cut output if costs are too much to cover (shift to left). If cost can be reduced, leftover money can be spent to increase output (shift to right).
Change in number of producers: if some sellers ceased to operate and the remaining ones did not increase output, supply will shift to the left. Increasing sellers in the market= right shift. Technology: generally technological advancement will either increase maximum output or reduce production costs. Either way both will shift the curve to the right.
The environment: depending on the industry production can be affected by seasonal changes or extreme weather (hurricanes, tornadoes, droughts, blizzards, etc.). Some flourish in certain environmental conditions while others won't. Change in output: sellers may wish to change over to a product. The supply of one will shift to the left (decrease) while another will shift to the right (increase). The supply curve, together with the demand curve which has an inverse relationship with the graph, will form an intersect. This determines the equilibrium price for quantities to be sold. If prices were set above the equilibrium, a surplus will occur. There will be a higher supply than demand as less consumers are willing/able to purchase the good/service at a higher price. Therefore there will be leftover quantities. If prices are set below the equilibrium, a shortage will occur. The demand will be higher as more consumers wish/are able to purchase at a lower price but the supply will be lower, so there won't be enough quantities for all consumers. Reflection on Supply At first it would seem that supply is dependent on demand as markets for goods/services only exist if people desire it. However it’s not. Consumers wish for food to nourish themselves yet natural disasters can instigate famines. People will fervently wish for certain goods yet governments can prohibit them from marketplaces. Producers have autonomy, but no matter how sought out the product is, they need to be capable of providing the demand of a product to consumers. Supply Demand They are part of a volatile yet mutual relationship in economics and they play a dire role: They need to continue to provide for the consumers and do so according to trends and future situations. Without producers, there can’t be supply, and no supply causes resentment, unrest and crime to emerge. Economies struggle to function and they become crippled. I find supply and its implications to be compelling. When it was first discussed back in Business Education 9, I was told little why supply curves are included along with demand, or why they are even significant. Now that it was elaborated further in Economics 12 (how technology, the environment, production costs, the number of sellers and switching products dictate the curve), it can aid me out of high school. For example, I can run a business selling… Hot tubs! From my experience working at a hot tub dealership, there is a viable market for them since its recreational and therapeutic benefits pleases an older and family-oriented demographic. I can also sell hot tub chemicals to help my customers maintain them and additional accessories (toys, lights, knickknacks etc.). As the Canadian population continues to age, the demand for hot tubs will likely rise. To fill that demand there will be more hot tub companies available that will increase the existing supply overtime. More purchases are made in the summer than in the winter (pleasant outdoor weather vs. harsher conditions); to keep up with demand, output has to increase to keep steady prices. However the problem with hot tubs are their steep costs. Their strenuous production process, including labour, fixed capital, high resource requirement, research and shipping, is expensive. Lower outputs would keep costs within the revenue, but a lower supply means an increased equilibrium price. I assume that as technology improves for production, prices to sell hot tubs will fall, or there will be more available to sell to consumers. When hot tub sales rise, so do chemicals and accessories (they are complimentary goods), so the supply for them rises as well to keep up with the increased demand. It should be interesting to note that purchasing, or at least renting, property for my store is related to supply. Property, housing and stores are considered fixed commodities; you can't simply add more spaces when demand increases. For this reason the supply line is a straight vertical line on the graph. Since the demand curve should continue to shift to the right based on an increasing population, the price for rent or for purchasing property will continue to rise. It's the reason why property is expensive, and its why property is considered the biggest investment in someone's life or business. Elasticity generally describes how consumers/suppliers respond to changes in price.
There is elasticity for supply and demand curves, but for this purpose I will discuss elastic demand only. Elasticity can be represented using an elasticity coefficient.
A coefficient= 1 means elasticity is unitary, where quantity demanded and price will change at the same rate.
A coefficient more than 1 means quantity demanded changes more than price. This is considered elastic demand.
A coefficient less than 1 means prices change more than quantity demanded. This is considered inelastic demand. Elasticity of demand is very helpful in determining revenue approaches. Should this business charge higher prices, or should they lower them? By studying quantity demand trends businesses can attain the highest possible profit. Businesses with elastic products should lower prices. With a greater Qd change rate than in price, more consumers attracted to lower prices mean larger revenues, even if prices are falling. Businesses with inelastic product should increase prices. With a greater price change rage than in Qd, people may still be dependent on the product. Therefore they will still by under a higher price and increase revenue for businesses. Why elasticity exists: Luxury vs. Necessity: products like food, shelter and clothing are considered inelastic since they are essential for the consumer's survival. Items like video games, televisions, comic books and sound systems are products people can live without. Therefore they become elastic. Percent of Budget Spent on Product: Usually items that take a smaller percentage of a household budget (napkins, paper) are inelastic (it won't affect the budget much). Items that take up a larger portion (cars, houses) are elastic since they take up much of the income (so households wish to wait for a price drop). Substitutes: when a product has more competitive brands (Hershey, Mars, Nestle) it becomes more elastic (consumers can switch over to another brand if prices rise). However when it comes to what the actual product is by itself (chocolate bar), the good is inelastic as there no substitutes in existence. Amount of time since price changed: the longer the price has changed, the more elastic a product will become since consumers have the time to find new substitutes. The idea of consumers reacting to even the slightest price change is familiar to me, but I didn’t realize the significance of this until elasticity was discussed in Economics 12. It really can determine how businesses understand the nature of their product. Is it something that people need? What are my competitors? How long do I have until people seek elsewhere? Would it matter to people if my product took up some of their income? These are factors that businesses need to be aware of. Determining elasticity can lead to prosperity, or it can lead to problems. With elastic demand, it ties into hot tubs, the product of Jacob’s Hot Tubs. It’s a luxury item that few can live without. It costs hundreds of dollars and additional costs are needed for maintenance. Also there are substitute brands in existence and it doesn’t help that there are other solutions in relieving stress, injuries or finding fun. It would seem that lowering the price for hot tubs is the best solution but with production costs high, I can’t afford to. The solution that I have is to advertise hot tubs as a natural health benefit to consumers. It can rapidly progress healing for injuries and acts as a pleasant, remedial soother for those high in stress. It can also be great for after exercising to wear away aches and pains. If I can target athletes, older people and all sorts of others, people will then see the need to own a personal hot tub for their homes... ...and the elasticity coefficient will lower. Jacob's Hot Tubs Whether I decide to run a business or consider personal spending, these lessons from microeconomics will remain ingrained in me. I feel closer sating my goals. Thank you!
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