Prices for goods and services in a market economy are subject to the economic laws of supply and demand. Supply is the amount of goods or services that is offered for sale at any given price. In other words, producers/sellers will supply a product only if they think there is a sufficient demand and profit for selling the good or service. If there is no profit, there will be little or no supply to buy. Likewise, the demand for a product is linked to several factors including style, price, quality, and advertising. As consumers demand more of a product, the price often go up if a shortage happens. If producers are unable to find additional buyers, the price will drop. Consumers (you) view the world from a demand perspective. Producers (sellers) and consumers meet at the equilibrium point where the final sale is made.

Please go into the readings section of our course and find the Supply & Demand reading for further explanation and to answer the following questions (always in complete sentences which contain the question in them please):

1. If demand is high and supply is low for a given product, what can you assume about price?

2. If price is high for a product, what can you assume about demand and supply?

Some products are said to be inelastic which means that when prices increase, people are still buying the product, despite the higher price. Examples of inelastic items include gasoline, milk, prescription drugs, and bananas. On the other hand, some items are said to be elastic which means that people are very sensitive to price increases and can easily find substitutes. For instance, if butter prices increase, people will use margarine. If milk prices increase, sales of powder milk will increase. However, If the price of gasoline stays high, it will take a long time to move closer to work and school or buy a small fuel efficient car. People will find substitutes over the long run.

3. Please provide two more examples of inelastic goods (or services).

4. Please provide two more examples of elastic goods (or services).

Some items are said to be complementary to each other. Compact disks and CD players are sold separately, but used together. As downloading music onto i-Pods increases, it is lowering the sales of CD's and players. As people buy fewer CD's, they are downloading music, and this is called the substitution effect. Finally, if you were offered free pizza, eventually you would have had (five? seven? ten?) pieces and stop eating - even if the pizza were free. The saturation point, where consumers are satisfied, is known as the law of diminishing marginal utility. An additional unit of good or service no longer provides satisfaction.

5. Can you provide an example from your own experience which illustrates either the substitution effect or the law of diminishing marginal utility?

Let's back way up for a moment and realize something anew. All resources are finite or limited. You may recall from a science class the first law of matter: Matter is neither created or destroyed, it only changes forms. So everything we have on this earth is really only what we have and - well nothing is "free," in other words there is some sort of "cost" attached to everything. This concept of scarcity naturally ties in with supply and demand and we don't often consider it, but why should we? In America it seems we have access to most everything wherever and whenever we want it. Got a taste for Oreos at midnight? No problem. Need to go on-line and buy shoes at 5:00 AM while taking the train to work? No problem. Still, scarcity exists and can be very powerful (scary).

In our readings section you will find an article that further explains scarcity.

6. Please provide an example of when either you personally, or others, had to deal with the very real issue of scarcity. Does your example have to deal with something that was completely unavailable or was just more expensive because it was scarce?

We are in the midst, but hopefully recovering from, global economic recession. Economists argue over the definition of a recession but suffice to say it is a period (half a year or more) when there is a real decline in economic growth/expansion or even a contraction/decline (less goods being manufactured, bought, sold, less people working) Economic activity is down nearly everywhere around the world. Here are the symptoms:

• More people are unemployed and out of work
• Business failures and personal bankruptcies at record levels
• Home foreclosures (being taken away and sold to recover the money lent at closing) at record levels
• New home starts (building) at fifty-year lows
• Large government deficits as tax revenue declines and aid applications increase

Labor, as you've probably guessed, is subject to the laws of supply and demand as well. Star athletes and singers, etc., make a ton of money because the supply of that type of talent is low while demand is high. Unfortunately though, in a recession, the demand for other types of labor can fall having devastating consequences.

Read the article "Downturn Creates Glut of Drivers" from our Readings section and then re-write the following sentences filling in the blanks please.

7. For years, what did trucking executives complain about?

8. "There is a huge _____________ of drivers right now".

9. "The supply and demand lines have ______________, and there are now more experienced drivers than jobs"

10. Over ________ trucking companies went out of business during the first six months of 2008 and _________trucks were idled (not in operation) during this time?

Supply and demand also impacts real estate (defined as land, houses, business dwellings, etc.) which normally appreciate in value as opposed to other goods such as cars, cell phones, electronics, etc., which depreciate rapidly are are often worth much less only a short time after purchase (think about it - computers? Flat screen televisions?) Historically, real estate has generally increased in price (appreciated) because "they are not making more of it". More people and greater wealth will push up land prices. Of course other factors are at work too.

From 1999 - 2005: Real estate prices increased dramatically nationwide and it's important to understand why:

• As the stock market "bubble" collapsed, many investors turned their money towards real estate.
• Interest rates declined significantly, allowing borrowers to buy more housing.
• Lenders relaxed their standards and were willing to lend mortgage money to sub prime (risky) borrowers. Sub prime borrowers are people who have poor credit histories of paying back their previous loans. Historically, people with bad credit were not able to get loans, but now they could.
• Credit rating agencies and banks overlooked risky lending to gain short term profits.
• People started buying real estate based on speculation (like gambling) trying to make make quick gains and reselling the property (as your instructor did more than once)
• Demand was greater than the supply of housing. Home prices nearly doubled in value in eight years.

From 2005 - Present

Interest rates increased, but then fell again rapidly. Rates are low again, due to the recession.
About two million sub prime borrowers have defaulted on their loans, causing a major problem in the national economy.

• Real estate prices have dropped in most places (about 14% overall since 2006), and have stayed flat elsewhere.
• Loan defaults (by people who can't pay their mortgage or home loan) are threatening the entire economy.
• Thousands of jobs have disappeared in construction and real estate.
• New housing units are not selling well, and the number of listed homes has risen significantly.
• Housing supply is greater than current demand.
• There is widespread unemployment among builders, mortgage lenders and related industries.
• Rental housing prices have increased.
• Getting loan or credit approval is much harder in 2009 for millions of Americans, which puts off home buying for many people.
• People took risks with the housing market, and they lost.

11. So let's say that during 2003 you borrowed $200,000 (with no money down which some lenders were doing) and today that home is worth only $175,000 how money do you owe, how much can you sell it for and what have you made or lost?

12. Let's say you bought that same home but did so with the typical 20% down payment (to avoid the extra cost of private mortgage insurance) and only had to borrow the remaining 80% or $160,000. How much do you owe, how much can you sell it for and what have you made or lost?

Now all that assumes you still have income to pay your mortgage and are not in default. Think of those who have lost their jobs, are losing their homes and can't even sell them to pay off what they owe (which they still owe by the way!).

13. Assume you are speaking to a first-time home-buyer and give them several pieces of advice based on the what you've learned about the housing market and buy property.

In the Spring of 2009, the U.S. Congress and President's Bush and Obama have agreed to a massive homeowner assistance program to ease the problem of home mortgage foreclosures. We are now in an official recession, but unemployment rates are increasing and fear of rising unemployment.

14. Should the federal government (taxpayers lke you and I) help out people who are losing their homes? Why? Should any loan assistance money make differences for people who are simply "down on their luck" versus those borrowers who made poor decisions and lost?

In addition to real estate, buying a car is a major decision and investment - and the worst kind because it depreciates so quickly. Your instructor favors buying used cars being sold by senior citizens or at least certified used cars from a dealer. Pay cash, and do not borrow money until your income and savings are sufficient. Avoid obsessions about car styles, until you are established and can afford it. A car is for transportation purposes only. (I often joke with students who brag about their cars by asking them what their houses look like. The point is invest your money in things which will grow in value over the long term)

Listed below are some basic questions to consider when purchasing a vehicle:

• Do I need a car? Can I continue to share a car, or drive my current one?
• What is my price limit? Am I going to borrow money to buy this car?
• What car makers sell good cars? What are the "rates of repair" and "customer satisfaction" levels among different makers?
• Who are reliable car sellers? How can I predict if this used car is a "lemon"?
• Do I have an emergency fund to fix any repairs or unexpected expenses? How much is sufficient?
• Can I find someone I trust to help me through the car buying process?
• Can I afford auto liability insurance (which is now required in Wisconsin)
• How can I keep my auto repair expenses low?
• How can I drive safely and park legally as to avoid tickets?
• Is there anything suspicious about the car seller? How can I tell?

Investigate this site for car buying tips.

15. Write a solid seven-sentence paragraph summarizing the advice you'd give yourself or others in terms of purchasing a vehicle (using the questions above and the site provided).

Want my advice? (One student said advice was the only free thing on earth :))

• Buying a car is like buying anything else - shop often and don't wait until you need a car to go shopping for one (doesn't mean you have to buy one). My wife does this with clothes and shoes - she knows when she's getting a good deal because she shops often.
• The Internet is awesome - find out what people are paying for the car you're interested in (making sure you are comparing exact models, trim levels, etc.) and use your research with a dealer or individual buyer.
• Don't be belligerent - car dealers are in business to make money too and being overly assertive simply isn't appropriate. Smile even when asking the tough questions.
• Remember the one thing you have on your side. You may not know the exact amount a dealer paid for a car, etc., but you do know that there a lot of dealers selling cars. Get the best price from one and then go down the street to the next. Bounce back and forth like a ping-pong ball (they hate this - which is how you know it's a good strategy)
• Know the difference between buying and leasing. If a car is advertised at a lease price of $219 a month for 36 months, but requires $1999 at signing, then the total price is $9883 or actually $275 a month over the 36 months. Know the true cost of the lease, find out about other costs and penalties when leasing and wonder, "Why do they WANT me to lease?"

Way to go - almost one third done with our course already!