Gasoline prices and how they affect many markets. Nice practice!

Here is a terrific article from the WSJ (I think it is ungated) that illustrates a bunch of introductory microeconomic concepts within the Supply and Demand unit.

This paragraph speaks mostly to the Demand-side:

“Households had the potential to save $630 at the pump, of which they spent the majority—58%. This spending provided more than a $200 boost to spending on non-gas goods and services, primarily restaurants and retailers. The lower gas prices also caused significant changes in household transportation choices, leading people to spend $150 more at gas stations and spend less on transit.”---WSJ Real Time Economics

Substitutes, Complements, movement along and a shifting of various Demand curve(s).

Happy graph drawing!

How are Complementary Goods like Unicorns?

Sometimes is it hard to come up with good examples of Complements when studying the basics of supply and demand.  They can be elusive, like unicorns.

Complementary Goods are generally taught as a demand-side function.  It describes the relationship between two goods that are separate and distinct but often (or always) used together. There is an INVERSE relationship between the change the price of one good and the demand for the other.

Here is an example (source HERE)

Low meat supply, low spice demand

You may remember hearing about a shortage of certain meat products at fast-food restaurants in China over the summer, due to the news that a major supplier was handling meat improperly and selling expired meat to restaurants. 

The impact reached across oceans, certainly to the fast-food chains like McDonald’s, which changed suppliers and couldn’t keep up with the demand because of the news. 

But less meat to eat also means less meat to season, so McCormick & Co. Inc. also lost out. The Baltimore-based spice maker acknowledged the effects in its quarterly report Thursday. 

“Our quick service restaurant customers in the Asia-Pacific region are currently being impacted by well-publicized supply issues,” said President and CEO Alan Wilson. “This is affecting our sales results in the region and has us cautious in our near term outlook.” 

That region showed a 1 percent decrease in industrial sales as a result.

With a decrease in supply of beef the price of beef increases.  When the price deceases the quantity demanded for beef decreases (movement ALONG the Demand Curve).

With less beef being produced and consumed there is less need for complementary goods, like spices. The Demand for spices will decrease as a result.

Notice the inverse relationship:  Price of Beef Increases, the Demand for Spices  Decreases.  

That is characteristic of Complementary goods (and services).

Why has the price of computers decreased but the price of broadband internet connection increased (or HAS it?). If you need an analysis for a Microeconomics class this will be helpful.

...or a Macroeconomics class as well...

The author of this blog entry (found HERE and also pasted in full below the fold at the bottom of this entry) uses a graph to show how, in the last 5 years, the price of computers (BLACK arrow) has decreased over 40%  but the price of Broadband (RED arrow) has increased (slight, but an increase).

While the blog entry is very short it suggests (explicitly and implicitly) 2 Microeconomic and 1 Macroeconomic concept that are important for students to know.

(1) In Microeconomics, two goods are considered Complements if they are used together. They are separate and distinct goods, each with their own market price and cost of producing. They are largely dependent on each other to function profitably in the market place. 

When the PRICE of one of the complementary goods DECREASES (in this case computers), the DEMAND for the other good used with it INCREASES (Broadband Internet connection).  This makes sense.  People buy more computers so they need more internet access. This could be the reason, but...

(2) The computer market is vast and their are lots of competitors.  With more competition, prices tend to gravitate closer to the actual cost of production (this is a characteristic of a "perfectly competitive firm").  In broadband "production" this is less so:

"The high, fixed costs of broadband means that there hasn’t been a big rise in competition among providers, according to Scott Wallsten, Vice President for Research and Senior Fellow at Technology Policy Institute. Indeed, most Americans don’t have more than two options when it comes to wireline broadband providers...."

High fixed costs serve as a barrier to entry in markets. It takes very large upfront investments that may take years to re-cover.  Hence competition is more limited AND the producer is able to charge a price, dictated by the market demand for the good/service, that is something greater than the cost of producing.  In other words, the producer has pricing power ABOVE the Marginal Cost of producing extra units of the good/service.  This could be the answer, but...

The Macroeconomic concept comes from one the commenter's on the blog entry in regards as to how the Consumer Price Index is calculated and its accommodation for changes in the quality of a good or service over time. 

Is the price consumers paid for broadband in 2007 the SAME broadband they pay for in 2012?

If the price of broadband (consider it just a single good/service) has increased 10% since 2007  BUT the amount of speed, quality of the connection, and places I can access it has increased, say 50% or more, am I not better off per dollar spent?

Has the BLS fully accounted for this quality change and it is built into the price change noted in the chart, so in real terms broadband has increased 10%?  This could be the reason, but...

This is why I love Economics! All three answers COULD be correct!

What do you think?  Which one seems the likely culprit or am I missing a piece of the puzzle? 

Nice example of Complementary Goods---HD TV and Make-up Artists..

Today in class we started our unit on the basics of demand and supply.  I always do demand first because intuitively it is easier for students to understand---they are mainly consumers at this point in life. 

We covered briefly the definition of Complements---two goods that are separate and distinct but are most often used in conjunction with each other.  In general, there is as inverse relationship between the price of one good and the demand for the complementary good.  Below, from the Freakonomics Blog, is a timely reference to complementary goods that is a bit unusual---HD TV and Make-up artists.
Because of the high resolution of HD, every imperfection in skin and hair is magnified.  It has created a surge in the demand for make-up artists.

The price of HD TV (both to broadcast and the price of the TV's) has decreased as it saturates the marketplace. As more broadcast outlets adopt the format more of the goods and services, like make-up artists, that complement it will be in greater demand...

Does HDTV Increase Demand for Make-up Artists?

"A major technical change in TV has been the introduction of HD broadcasting and receivers. For the same price you get higher quality, so this can be viewed as a rightward change in supply. This change has affected a surprisingly related market—that for make-up artists.

Now if you’re on television, as I discovered, every single “flyaway hair” is visible. Most of my hair flew away many years ago, but what’s left might still stick out and need careful laying down by a specialist. A make-up artist tells me that demand for her services has been helped tremendously by the introduction of digital broadcasting and HD receivers."

Is gasoline a substitute or a complement for motorized scooters? Whatever the relationship the demand for them is going through the roof!!

The recent spike in gas prices is benefiting the bicycle and motor-ized scooter industries: 

Bike, scooter sales pick up speed

""Sales of new bikes rose 9% in the first quarter of this year, compared with the same period in 2010, and sales of road bikes — commonly used in commuting — jumped 29%, says Scott Jaeger, senior retail analyst with Leisure Trends Group, a Boulder, Colo.-based retail tracking firm. Sales of gas-powered scooters are up even more: nearly 50% in the first quarter compared with a year ago, says the Motorcycle Industry Council, a trade group. "We see spikes when fuel prices rise," says Ty van Hooydonk, the group's spokesman, noting many scooters average 60 to 80 miles per gallon.  When gas prices last peaked in the summer of 2008, Census data show bike commuting rose 15% nationwide from 2007.""

 Normally we think of gasoline as a complementary good, one that is used with another good such as cars. In this case, as cited in the article gasoline, bicycles and scooters are substitute goods. In economics we define goods as substitutes if the increase in the price of one good increases the demand for another good OR the decrease in the price of one good decreases demand for another good.  The relationship between price and quantity demanded is DIRECT in the case of substitute goods.


The increase in gas prices is increasing the demand for bicycles and gas powered scooters. It is very easy to see that a bicycle is a substitute for gasoline because they are not used together. But it is more difficult to see how a motorized scooter, which uses gasoline is a substitute for, well, gasoline.

I think the easiest way to understand this is to establish the "strength of the connection" between the two goods. Although I use gas in my scooter I am trying to GET AWAY from the high price of gasoline by substituting to a good that will allow me to consume as little gasoline as possible. If gas prices decreased and the demand for, say,  gas-guzzling SUV's increased, then consumers are RUNNING TOWARDS  more gasoline consumption---gasoline and SUV's are Complementary goods--the decrease in the price of gasoline increases the demand for SUV's.  Complements have an INVERSE relationship between price and demand.   

We can extend this to hybrid and other fuel efficient vehicles.  Gas prices increase and the  demand for these categories of cars increases. This meets the definition of Substitute goods.  Gas prices increase and the demand for SUV's deceases. This meets the definition for the goods to be Complements. 

On the AP Microeconomics test, they usually don't divide the line this thin. However, it will be in your interest to deepen your understanding of the differences between Substitutes and Complements.