The Economics of Price Controls

Rent= payment for  the use of capital, something that acrues to you without doing productive activities
(Idea, tax rent b/c not doing anything, don't tax work, we want people to work)

Market Equilibrium: P* = $1,000, Q*=12,000
Controlled Equilib: P (with price ceiling) = $800. Qd=14,000 Qs=10,000

If dictate lower prices, less suppply
-->landlords can only charge $800, the quantity supplied is lower
Consider the costs to deliver, some space becomes coops, offices buisness
-Quantity supplied falls by 2,000

Long run, supply of apartments elastic, able to adjust the number of rooms, wallls
Price lowered does NOT change demand
BUT the quantity demanded increases
-People decide to share apartment, live at home,

Ceiling: price doesn't change
-creates new equilibrium, controlled equilibrium
-->shortage of 4,000

"Price ceiling is binding" ->set price control below price that would have prevailed in the market
(Not binding means above market price)

Why equilib?
Buyers/sellers cannot do something better
-->sellers' plan satisfied, buyers plan not satisfied

Consider: less apartments than before price control!
w/out control, buyers can bid up the price

At price of $800, are apartments less scarce?
Depends why the price fell.
If legislated price, unclear

Consequences of Rent Control

1) Reduced availability & harder to get

-Some other cost will arise

Qd = Qs = 10,000, want to reach equilib. demanders find way to get

ex: wait in long lines to get gas, drive around to find shortest line

all things incr. the cost of obtaining beyond the sticker price

2) Lower Quality Apartment

-Leaky pipe kept leaking; if you don't like, plenty of other people ready to buy that apartment

-Cost $ to fix it, & cannot charge more for rent, cannot afford repairs

3) Other $ Will Be Paid, Black Markets

-Customers willing to pay more than $800, landlords may charge "finders fee"

ex: apartment brokers find apartments for you, illegal bribes/kickbacks

4) Misallocations

10,000/14,000 = 5/7

-People who value the thing the most may not get it

-Live w/ annoying roommate, can't move out b/c hard to find apartment 

Sublet: cheaper to keep large apartment, sublet rooms but gains do not reach the landlord

5) Other Markets

More expensive to live in the city, now more expensive to sprawl, AND incr. $ to transportation

6) Fairness

Who's able to pay

7) Discrimination 

Cost of discrim. reduced, don't allow market to work, don't face costs

-Age, size of people, sexual pref. race, don't allow market to work, don't face the cost 

-Without rent control and don't lease out, lose the $ of those people

-point of market clearing means no line to fill up

-BUT with rent control, don't lost $, plenty of people will find you

By being landlord, make room available to somebody, does some social if does discrim a bit

Consider: Buyers can be discriminating too

8) Monitoring/Enforcing Costs

-Costly to review boards, undercover agents

1. Reduce incentives; supply curve shifts in, flatter

2. Monitoring destructive

  -People/Resources not producing goods/services we want

  -example of broken window fallacy, wasteful practice

-->world without rape, fighting etc. there is no need for cops

-Right kind of regulation yes, but goal should not be regulation

3. Even if police do good job, (ignore waste) have to raise taxes to fund; taxes costly on consumers and to collect

Fire that Central Planner

Sellers should only worry about their own costs
Buyers: don't need to know reason behind price, just whether they value that good enough for that price

ex: suppose agreed fed gov't should have strong role in health care, 1 size fits all, same for all states
What if...wrong?
In market, have incentive to solve problems
In gov't, no plan B even though different states have diff. needs
Trial & error successful in markets but not in gov't--> should mimic experimentation

What's useful about market equilibrium?
Lines cross, all happy, can't do better
Those who value the most will get the product

Resources used are the cheapest to employ; Chicago school of econ says you'll walk past a $100? b/c markets efficient enough...silly

4 Problems For the Central Planner

(Imagine 5 Demanders, 5 Suppliers, Happy Point at 3 Guitars Produced)

1) Who Should Make Guitars? Don't Know Firm Costs

Should one producer make X amount or all? Maybe S4 make all guitars? (But oppor costs $25)

-Price to pay workers, rent, electricity

-Profit missed from doing something else

Only costs S2 $15 to produce, world would be poorer if allocated wrong

2) Suppose got the sellers right, S1 S2 S3 have lowest oppor. costs

Who decides who gets the guitars?

Prices force people to reveal themselves to show what they value the most

Imagine if the wrong people were forced to consume those guitars 

D4 gets $15 of pleasure from it, but D2 gets $25 of pleasure, world would be $10 richer

3) How know that 3 guitars is the right amount to produce in market?

Cent. Planner says to produce 1 or 2

Problem: too few guitars, still more deals to be made!

Markets are NOT about producing as much as possible

->Produce 5, demand low don't value the guitar, too much created

4)? Social Responsibility of business

Price = cost/values, what does society deem as important

How firms handle burden?

ex: MA premium incr. for policies; MA healthcare plan passed BUT did not measure the increased cost on suppliers

Consider: MA in better health, better education, & more people uninsured compared to the nation

-->entire country cannot match MA people, should have diff. plan

Problem: need for more doctors so costs went up

ex: 60 aired segment on huge amnt of Medicare fraud, health issues matched with list of ppl

1) health & human services

-big challenge pays out billions of claims a year

BUT medicare becomes bigger! 

2) Why took gov't so long to notice?

It was "well-intentioned", didn't think would attract fraud

Problem with Central Planner:

No incentive to produce; Markets provide financial incentives 

Accountability for aid

-->Some aid makes poor worse off or doesn't help at all

Knowledge problem-->Need feedback!

Lesson: Survive, must decentralize decision making

States should be humble in light of knowledge problem

ex: let states be unique in health care

"one size" does not necessarily fit all

-learn from mistakes & keep trying

-Need to be rightly oriented to issue

Rent Control: Price Ceilings

-Legislate rent control, can't raise price above some ceiling

-->landlords can't raise and sellers can't bid for a higher price; Should it apply to all?

Why is the moral responsibility of the landlords? Not only provide bed, but MUST provide cheaply

Exchange is Immoral

There is no perfect system or solution for an issue, like room assignments, that affect a large population of individuals with unique situations and needs. Reading the housing process of Duke university reminded me of our own college's policy; both have instituted a room lottery that favors groups. (Ours simply has become more exclusive with the points system). It appears that the administration has done its part to impose a system that is as "fair" as possible, but it seems the process may change in light of the monetary exchange between student groups to swap housing assignments.

I was surprised (and initially impressed) that the Duke administration allowed students to trade assignments amongst themselves. But I'm not sure I understand why that trade becomes a "disgraceful" problem when money is brought into the trade; as the author of the post pointed out, both groups benefited and obtained housing for less than they valued. And furthermore, no party was hurt in any way (the neighbors of the BSSG are probably grateful as well for the swap with the fraternity). 

I think college administrations forget that even though we are students, we are still technically adults and should be able to make mature decisions about where we choose to live. It is important to note that the Duke student groups had the right to turn down the money offers from other organizations; they did not have that right to refuse the assignment from the lottery. I also believe the administration would find LESS student complaints about neighbors if students have more flexibility of where they live and can share spaces with other groups that have similar living habits.

Don't Mess with the Price System

Other systems besides price fail because they do not provide incentives.
-->imagine if ration by height, nothing gained
Making things "law" is dangerous, forces someone to provide a service



ex: 64 yr breast cancer survivor, would have to wait 5 months to see doc about her back, but the visit is free
BUT she can pay to see a doctor sooner
-A cyst would be covered by nat'l health care, but she was denied because she could afford the sooner visit
-People complained that she used the price system to jump the line
Consider: some people do need medical care more desperately
-Eng doctor-->not incentivised to do more surgeries or to do the hard procedures

The beauty of the market system
1) don't have people determine if "needy" or not
2) Will not waste suppy
-NO vaccine police to solve; production/consumption solved by price system

ex: Water Ban
-Don't run water, take dog swimming, don't..
-shortages persist, persuasion doesn't work (sadly, proof is in the cheating on our test)
-little less becomes a lot less
-expect price to rise, buy more now and put more pressure
-people don't realize the full cost of water use

Prices Force:

1) Value Cost; plan to use water when deem worth it
-cheap, use more $$ give up least valued uses of water
-Doesn't require force from police
2) Consider value others place on water
-If price jumps to $10/gal, says someone out there reallly wants it
-->make decision not to buy the water

Price gives chance for people to gain from transaction
-Price water & it rises, incentivises producers to make more
-entrepreneurs find to ways to produce water
-w/out price, not enough water
Allocated wealth, right people produce/consume

Why kidney transplants 4?
-lack of specialization, kidneys buried
-people dying from kidney failure
Obj: legalize kid. sales
Would unethical methods increase because of chance to make $?
Imagine, ban sale of kidneys
-->profits HUGE on black markets, marginal value highter

People thing of healthcare as a sep. good
-Scarce, how distribute to society?
What should determine who gets health service?
-w/ burritos, no objection
--> those value, get them, why different in health care?
-No one argues we should all eat same, wear same, live same

Founders of Eng. health care system wanted ALL equal, rich and poor alike
BUT inequality greater today
1)Impossible to make healthcare indep. of income, occupation, education
2) Even if possible, is it always worth it?
3) Why do so many people talk about it?

Consider: some heart surgeons better than others
-->depending where you go, some get better care than others
Imagine if line for best surgeon is across the country
-not everyone can afford the plane ticket to get there, the hotel etc

"Free Education"
-Must be able to buy home in that area, get to work from that house
=>therefore, access to education is not equally distributed

Make choices by flipping a coin?
90 yr old lady vs 20 yr old student, who gets the new liver?
-yes, veil of ignorance;

Imagine world without money
Guitar maker, need materials to build and stuff to live
    -money changes the nature of the transaction
Guitar maker wants a toothbrush, have to go around and find someone who makes toothbrushes
Does that producer want to exchange for a guitar?
-->Bartering takes time, waste chances to make more guitars or toothbrushes

1)Double Coincidence of Wants
2) Divisible: in barter world, have to divide stuff
-ticket=$200, guitar $2,000, give 1/10 of a guitar?
--inconvenient, hard to divide,
imagine paying for car with guitars, costs 100s of guitars
-->$ allows us to exchange more easily

why use price=assign monetary value

What Were They Thinking?

Well before I had step foot into an economics class, my friends and I were puzzled about a supply issue. Wendy's of course, offers delicious frostys and looking to save calories but still enjoy the cool dessert, my friends and I would get the kiddie size. Last summer, small frostys were offered at 99 cents, but the kiddie size was $1.50 (or something like that). Now, as much as I like conserving calories, I also like saving money, so I opted for the LESS expensive but the BIGGER size. This completely contracts the Law of Supply and common sense in my opinion. The only reason I could see why Wendy's would charge less for a larger size of the same drink would be if customers are more likely to buy more food when they buy more drink. For example, some people enjoy dipping their fries in the frosty (not me). Perhaps if they have a larger frosty, they would be willing to buy MORE french fries, or opt to get a burger too. In any case, I settle for paying less and eating half of my small (when I have the self control).

Supply Propoganda

 

During World War II there was serious rationing of goods nationwide; people donated scrap metal, created victory gardens and reduced the use of gas. At that time, demand for a variety of goods remained consistent while the amount of supply was greatly diminished due to the needs of the American army. These posters demonstrate another way to change people's consumption besides the price system. In this case, the public was inspired to demand less to be patriotic; it was their contribution to the war effort. By eating less meat or by using alternative materials for aluminum,there was enough for the army and people felt they were helping the nation. People respond better to positive persuasion rather than negativity or force. (But arguably, fear also is a significant inspiration) This campaign was successful because children, women and the elderly felt were a part of a bigger effort.

Another type of opportunity costs: what other customers are willing to pay
ex: hotel raised price of room during golf tournament
-gouged?! What if put out sign saying incr. b/c of tragic accident? Does the reason matter?
Price a business charges is what people are willing to pay, what they value at that price
-->Rizzo didn't like $$, shared bed instead of pay money for own room
-incentives for homeowners to step in and offer rooms for cheaper

Many ways to allocate scarce goods to people
ex: How get 5 fish to 12 people?
-all 12 can't have a fish
-price system = the rule to follow

ex: Pres Obama criticized insurance companies for rationing coverage
consider, # of people who need healthcare compared to amount of health care provided
BUT we ration everything else

Sample Rationing Criteria

1) Need

-vague, subjective, hard on a grand scale

-Who determines what is need? $? physical pain?

-How demonstrate more needy? (costly, uncertain)

2) Queue

-First come first serve; waiting inconvenient 

-Even if free, the line is cost

  --perhaps camp out, pay someone to wait for you

-CEO of company, poor working all hours, perhaps cannot afford to wait

3) Lottery

-Often considered "fair"

-Value/need goods but may/may not get it

4) Equal Shares

-Pure communism, divide equally and everyone gets some

-Low cost role

-Problem: not able to properly divide

  --If large number, barely receive anything and reduce the value

5) Might Makes Right

-Free for all! Biggest/strongest gets the fish by fighting for it

-Planning difficult, costly

6) Merit

-Ration scarce goods to people who "deserve" it

-est criteria (think college admission) social judgement

-says nothing about the value of achievment

   --Does intention matter over outcome? Problem: reward for duty rather than success

Evaluation of Rationing Mechanism

1) Where does competition come from?

-does not come from rationing 

-Derived from scarcity -->compete regardless of "rules"

2) What is the nature of competition?

-Destructive or Constructive

Destructive:

ex: Boys compete for Caroline, to get the date they need the biggest biceps

-->guys work out curls constantly;

Destructive, costly; they're not studying or doing what they enjoy

Competition: here, only focus on the self and produce nothing to sociey

ex: Rizzo does steroids to outcompete

-->BUT other guys do roids too and everyone gets bigger

-Still only one winner, nothing better produced

Constructive:

ex: Caroline wants the guys to bid for a date

-Boys compete by making $

-->teach econ, clean floors, bake goods

-->society is richer! Competition, something of value produced and the "losers" still have $

3) What are incentives for producers to make/deliver more?

-problem of supply

-compete over prices, people care about income

Consider: seem poorer, college will reward defect, dishonesty

Theory of Supply

All relevant costs for a producer are opportunity costs
--> more burritos, give up chance to make pizza

Quantity Supplied vs. Supply

 

Price	Quantity Supplied
$0	0
$0.50	0
$1.00	1
1.50	2
$2.00	3
$2.50	4

-Think of price as related to opportunity costs of producing that particular burrito
-Each pt =marginal oppor. cost (recall points on demand curve also marked margin)

So long as make each burrito 49 cents, will make a profit if sold for 50 cents
-Some prices are too low, could never earn a profit (perhaps it costs 80 cents to make 1st burrito)
NOTE: supply curve slopes up

"It costs more to make more"

How do producers change as prices change?

Do the cheapest, least costly way first

Supply: relationship of how respond to prices; marginal opportunity costs

Total Costs of Production: marginal costs of each unit produced added together

-area below to the supply curve up to that point

What can we learn from the supply curve graph?

1) Marginal

2) Total Cost

   = MC1 + MC2  ($1.00 + $1.50 = $2.50)

3) Total Revenues = P x Q

   2 x 1.50 = $3.00

4) Producer Surplus = total rev. - total costs

   -How much money is made, "profits"

Why do supply curves slope up?

"Law of Supply" 

Don't forget, violated, not always true

ex: labor supply, some usage may reduce work down the line, "backward bend"

1) Diminishing Return of Production

-harder to make more; tougher to make 5 vs make 1

ex: farmer owns 160 acres, which spot(s) to plant?

typically choose the best; imagine go from 10 acres to 20 acres

-next acres not as good, need more water, more fertilizer, more attention

  Consider, some technology doesn't matter, 10th download harder than 2nd?

2) Additional Resources

Imagine all the land is good, STILL have to buy more seeds, more machines, maybe more workers
-bid away tractors from other sources causes the price of tractors to rise

Changes in Supply

Quantity Supplied vs. Supply

Quantity Supplied: Change in Price -Move along the supply curve <--- only changes in price

Supply: changes in other stuff

-Supply curve shifts, causes a change in supply

 

<--Anything other than price that changes supply

ex: any change in factor (input) prices burritos need: land, labor capital

Rent falls: cheaper to produce

-expectations matter MORE for producers than consumers

ex:titanium on property; imagine that future prices will drop, dig up now to sell

-expect price to rise in future, wait

-->decr. production, also causes to bring up

(expect) change in technology -->supply curve based on constant

consider: improvement in technology improves production

-->shifts out

ex: changes in other markets

Pizza prices skyrocket, making big $$$

-> stop making burritos, start making some pizza!

Elasticity: changes in price to produce more

Price elasticity of Supply: how much more I will produce when price goes up

Relatively Elastic vs. Relatively Inelastic

Elastic: > 1
Inelastic: < 1
ex: longer time producers have to make decisions, more elastic (more choices)

Marginal vs. Average Costs

A	B	C	D = C / A
Burrito	MC	TC	Avg Cost
0	0	0	0
1	$1.00	$1.00	$1.00
2	$1.50	$2.50	$1.25
3	$2.00	$4.50	$1.50

ex: sell 2 burritos, market price $1.50

Sell next burrito if people willing to pay $1.75

-avg costs of production, $1.50, make a profit?

NOOOO

when producers think of unit #3, sell for $2.00, $2.01

could have lost 25 cents of 3rd

Consider: sunk costs 3rd burrito only matters when the ??? of last burrito, doesn't matter others

Avg costs matter for the long term

-firm entry/exit

marginal: incr/decr production

price system = way we ration goods in society

Let's Start Supply

Is it possible to have "perfectly inelastic" curves? NO.
ex: insulin to a diabetic: is there a  substitute for insulin?
Not exactly, but one could have a better diet, better exercise, prayer; not perfect but helps

Recall: demand curve, want and have the ability to get it
Consider: lower price, stock up (think will have in the future, maybe pay $60 for life supply)

ex: penicillin, not very big in 1880, but if someone really wanted it, could dedicate all resources to finding it

ex: claim "people will pay anything for healthcare", markets can't do it, costs don't matter
IF TRUE, does anything change in distribution? public health care = split check
Fact: 90% of US medical care paid for by others (gov't, insurance)
Why is this person wrong about health care?
Of COURSE cost is an issue; yes do whatever can to live
BUT also would eat healthy, avoid drinking, smoking, wouldn't get pregnant
--> we do not commit to life at alllll costs

-At some point, there is a substitute for everything!

Income Elasticity of Demand

 Quantity demand: > 0 "normal"
Income: < 0 "inferior"
-how much consumption/income changes
  -income consumption is NOT the same as price consumption

Income elastic of enviro = 2
-income up some amount, desire to spend $ on enviro goes up even more
ex: Income $50,000. spend on enviro $500 Income elasticity = 2
-Income increased by 20%
-spending on environment goes up by 40%
Change in I= $10,000
Change in E= $200, bigger share of income

Cross Price Elasticity
-complements/substitutes
Cross price is positive: goods are substitutes
(negative means goods complement)

Law of Supply
ex:Britain bought slaves to free them;
Problem was, the incr. # of slaves taken in caused the supply of slaves to incr.
ex: Chinese bought swords from Japan to deplete their supply, but Japan ended up producing more
-Prices go up and people want
-->respond by making more

Consider: riding the bus is cheap, for rich and poor people; other opportunity costs matter, relativity

Consider: price of grad school is very high, but people go during a recession b/c there are no goods jobs currently available

What are costs?
Consume resources, tradeoffs
Must be related to an action and to whom, not a thing;

-Must entail sacrificed opportunities
What is the cost of rugby? Ridiculous!
A cost could be attributed to how to play, to teach, equipment
-yes, for example pay Rizzo the worth of 3 projectors
-Costs of hitting making eating a basebell
-Costs must be costs to someone

Why cost more to make a mountain bike than a picnic table?
Price of stuff going into mountain bike higher value
-Also, consider other opportunity costs missed, metal of bike could be used elsewhere
-->others bid away resources
-cheap means fewer opportunities
ex: women in India hand cut the grass, can she obtain value from somewhere else?
Rizzo paid more than football coach
--> Rizzo could have many other employment opportunities; to keep him pay more for his salary
Skilled workers paid more than unskilled workers IF their skills could be used elsewhere

"talented"-sing and balance on one foot while work, paid more? DEPENDS
skills matter if they are valued somewhere by someone else

Quantity Supply: amount of goods that firms are willing/able to produce at a particular prices (a number)

Law of Supply: when price of good rises, sellers will make more
(a "most of the time" law)

Find a Nice Price

ex: own price elasticity of demand for apples
P(initial) $1.50 lb Q (int) = 6 lbs of apples
P (final) $2.00/lb Q (fin) = 2 lbs of apples

M apples = [(2.00-1.50)*1.50] / [2.00/6] = (2/3) / (1/3)

If /M/ =	Demand	In Other Words
< 1 (m > 1)	Inelastic	People NOT sensitive to price change
= 1	“Unit elastic”
> 1 (m < -1)	Elastic	People ARE sensitive to change in price

What Impacts Elasticity      

 1) Time

2) Budget

3) Substitues

Quantity Response vs. Price Response = Nothing significant about 1

Changes not instant - plan, save $ for later, buy cottage? Short run vs. long run

ex: Gas goes up to $7, will not go down

Short term: buy lots of gas

Long term: carpool, move closer to work, get better fuel efficiency

-Substitutes impact change demand elasticity

Steep Demand = Inelastic
Flatter Demand = Elastic
-Consider the Law of Demand, when expensive, consume less
-Compare, minivan, Ford minivan, red Ford minivan => the availability of substitutes matters

Total Recipts = P * Q 

If price increases, quantity decreases

If price decreases, quantity increases

Consider: tradeoffs of the firm

-Raise price, some people will pay more, but probably will lose customers

-Lower price, maybe gain revenue?

ex: TR initial: $500 TF final = $320

loss of customers: 6 x 50 = $300

gains from existing: 4 x 30 = $120

==> Lost $180

-find elasticity of demand of customers, sensitive to price change?

  -make $ by lowering the price

Expenditures NOT the same thing as cost

ex: MRI didn't exist in 1980s, do we consider them a cost? No, it is an expenditure

Theory of the Leisure Class

I did not expect to find an academic work that deemed drunkenness as "honorific" but I supposed it was a sign of the time this passage was written in (end of the 19th century). I think that Thorstein Veblen makes some interesting claims in the few pages that I read for this assignment. He asserts that the leisure class' persistence "furthers the survival and culture of predatory traits". Initially, I disagreed, thinking that survival meant that these financially well-off men were also of the best fitness to overcome natural selection; I thought these boozed fat cats would have no chance of better fitness than a man of lower class employed in physical labor. However, the men higher in class do not face the risks of labor, but reap the rewards. Perhaps one's intelligence rather than physical capability is more important to survival of man. I did disagree with Veblen's sexist ideas; even if it was the 1800s, no woman;s duty is to "prepare and administer these luxuries" for "men to consume them". If only Velben could see society now with women out competing men in GPAs and advanced degrees.

Did you "expect" your demand to stay constant? No way.

Individual Market Demand

At each price, add up the total economic demand 

-horizontal summation of the demand curve

1) Look at market/industry demand; flatter, elastic than individual demand curve

2) Aggregate demand

-assume all units the same (globs on GDP)

difficulty: modeling; when agg. price level increases, we buy less GDP

-includes all prices

Comparative Statics

-quantity demand; asks, what things impact how much we buy?

a) prices of the goods in question

b) "other stuff"

-Price of the good itself: change in quantity demand,

-->movement along existing demand curve

Changes on Demand

Consider boiling point of water; can alter by changing the pressure; in same way, other factors can influence how much we purchase

Things That Impact Consumption Choice

1) Income

2) Prices of Other Things

3) Expectations

- of price, of anything, way consume burritos

4) Tastes

5) # of Participants

1) & 2) ==> Ability to pay

3) 4) 5) ==>Willingness to pay

Demand Shifts Out:

At given price, consume more

  

-Demand has increased

-Price has not changed; 

Demand can also shift in when we consume LESS!

Income

When gain more income, consume more?

-more vacations, make repairs, buy clothes

-better quality of stuff

"Normal Goods" = when income increases, quantity increases

"Inferior Goods" = when income increases, quantity demand falls

-Goodbye ramen noodles and Genny Light! 

Consider, during recession people go to state parks instead of Disney; more income demand for $$ stuff shifts in

Price of Other Thing

a) Substitutes (Replacements)

-when burgers more $, demand of burrito increases

Demand shifts OUT

b) Complement (Go together)

-hot sauce price goes up, consume less burritos as if burrito price went up

In econ, no natural pairing of goods

-->examine relationships; price burger up, consumption of burrito up

Demand shifts IN

Tastes

-Burrito hurts stomach, change taste and shift demand

Expectations

Expectations of income

ex: student loans, expect future income to go up

(students consume more than their current income allows)

ex: Rizzo can't afford his current house, takes out mortgage because knows in future, wife will be employed and his salary will go up

Prices of Other Things

ex: Storm oncoming, prices rise but people buy more

-->desire to buy today, expectations change

-expect that prices higher later than today

-if think future prices go up, today will buy more

ex: Rizzo thinks natural gas will be the important fuel source of the future

-expects relative to oil/solar/wind thinks natural gas will be cheaper for electricity

-price substitute fall, change behaviors

Elasticity

How much more!

For good, when consumption responsive to price, demand is elastic

-sometimes if prices change, consumption doesn't change 

ex: no matter the price of pencils, still will buy the same amnt --> "inelastic"

but European travel is elastic

-when can measure elasticity with respect to anything

--> price of pizza, mood, temperature, age

Own Price Elasticity of Demand

-when price of your good changes, what do you do

50% / 20% = 2 (be able to express this in words)