Thursday, April 18, 2013

Supply and Demand Comic

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This comic pokes fun at the idea of supply and demand and visualizes what could happen in the absence of our normal market situation.  If it is not already clear, a very thirsty man is crawling towards a lone beverage salesman in the middle of the desert.  Obviously the demand is very high for the lemonade and the vendor being unopposed leads to a low supply and also demonstrates price elasticity (percentage change in quantity demanded dived by percentage change in price).  Price elasticity measures how much the quantity demanded of a good changes when its price changes.  In this case the lemonade would not have “elastic” demand as it would normally have in everyday life.  In a normal situation, if you went to the convenience store and made your way to the drink cooler only to find the lemonade you wanted was $200 a bottle, you would likely swap the lemonade (substitution effect) for a more affordable beverage.  In this instance lemonade would have a very elastic demand because it has substitutes and is not a necessity.  In the world of this political cartoon, lemonade has suddenly became extremely inelastic because it is now a necessity for the consumer and therefore the demand will remain constant regardless of the exorbitantly high cost and is immune to the income effect.  The size of the population generally has an obvious effect on the market (i.e. California’s population is 40x larger than Rhode Island’s therefore the state has 40x the amount of automobile purchases.) but the curve in this situation is basically not existent since it is stuck at a 1:1 ratio.  One characteristic of supply and demand that this comic plainly illustrates is called “special influences.”  For example, the snow plow market in Utica, NY is probably rather strong (during the winter season so this is a special influence within a special influence), while in Miami, FL the snow plow market is not very strong and probably never will be.  The comic shows us a very special influence, a dying and dehydrated man will pay any price demanded to get his hands on the lemonade.  While it may not seem like it at first glance, this situation has perfect market equilibrium.  Every single consumer in this market and single is the key word…is demanding lemonade.  Since the lemonade man clearly has the supply needed and only a single jug of lemonade to sell, there is no extra pull on either side of supply or demand.  This situation goes to show that, there is a lot more to supply and demand than one may think and that we should be grateful to have the type of market we do where (generally) the items we need are always in high supply and luxury items are also readily available.  Moral of the story, if you decide to visit the desert, bring some cash.


--Adam Keith

1 comment:

  1. I thought this cartoon was really good and visually defined the way supply and demand work very well. Supply and demand are very key and important macroeconomic concepts. It is a simple picture that makes it easy for the viewer to understand its message. When there is something very desirable, lemonade, scarcely available, as it would be in a desert, the person selling this scarcely available, very desirable product can charge a price that is much higher than the product is actually worth. On the supply and demand curve, the demand curve would shift greatly to the right, because of its very high demand. The supply curve would shift greatly to the left, because of the low supply of the lemonade in the desert. Together, this causes another great increase in the price of the good, even though a glass of lemonade is not nearly worth two hundred dollars.
    Another aspect that this cartoon does not show would be from the prospective of the vendor. In this very dramatic hypothetical situation, the lemonade vendor in the desert is likely going to have a very small number of people coming by his stand, and while he is the only stand there, allowing him to charge two hundred dollars a cup, a person wondering through the desert is very unlikely to have two hundred dollars in disposable income to purchase the lemonade. The vendor, even though he is in a position of monopoly power, still must sell his product at a somewhat reasonable price so that consumers can afford the product and he can make a profit. If not he will have very low sales and will actually lose money. Applying this concept to a real-life situation, it is important for market leaders, who typically charge higher prices for their goods, not charge to high of a price because people will not see their product as being worth the high price and will buy from the producer’s competitors. That is an example of how the market dictates prices of goods and services preventing prices from becoming unaffordable.

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