Changes in Demand

In a mixed economy there are numerous forces which change demand. They can be grouped as follows:

·         A change in preferences towards the product

·         A change in income

·         A change in price for a substitute product

·         A change in price for a complementary product

·         The expectation that future prices or income will change

·         An increase/decrease in population or a change in its income or age distribution

Example: In a small town a new bigger project was launched. A lot of local skilled workers got new job offers. They expect their income to increase. So they are going to spend more money for groceries. In my example below they will buy more strawberries.

Change in Demand for Strawberries
Price	Demand D1	Demand D2
$       2.50	110	120
$       3.00	105	115
$       3.50	100	110
$       4.00	95	105
$       4.50	90	100
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Game on - managing a business in a dynamic market and mixed economy

In a mixed economy Price is a driving force for buying-selling decisions. We have historical data for price fluctuations. Whenever buyer feels that the price is low – it is time to consider buying. Same works for selling goods. If prices are up the seller has a very good chance to make some money.

The scarcity of resources makes both buying and selling decisions more complicated. The online game I am playing has the features of real life: a farmer cannot invest all money into cattle even though the prices are extremely low; some resources should be spent for other necessities like food for cattle, wheat etc.

One of the ways to increase demand and supply for products is to go bigger and get a bigger share of the market. We may call it monopolistic approach.

The other way is to concentrate on some products thus taking a niche market space.

Possibility Curve

The mentioned graphs represent production possibilities curve with different variations. Scarcity of resources is a driving force for every graph (and economics in real life) and it means that only so many units of two (in our example) types of products can be produced. Opportunity cost means sacrificing of production of so many units of one product by producing so many units of desired product. Choice means what opportunity cost you pay by making your production decision. Say you give up producing 2 tons of wheat by choosing to produce 8 more cars. 2 tons of wheat is the opportunity cost.

I also have to make some choices managing my personal time and resources. I would like to make some renovations in my house and I also need a new car. My income allows me to do only one project at a time. So my choice is to buy a new car. There is also a time consideration for this decision. Renovation requires more supervision and I am very busy now with my courses while research is required for both projects. So renovation of the house is my opportunity cost for a new car.

My opportunity cost for returning to school has two components: time and money. I cut off my entertaining time such as reading, watching TV, socializing. I also have to pay for three courses per semester which is equivalent vacation in Mexico. These two are my opportunity cost. Instead I will gain better professional standing and salary increases in future.