Thursday, November 6, 2008

Fundamentals of Price

There are two articles in today's issue of The Wall Street Journal that can provide some insight into consumer behavior and price theory.

The first article reports that the incentive to switch to a hybrid vehicle is diminishing, first due to expiring tax credits, and second due to falling fuel prices. Both of these will essentially make it more expensive to "go green." With some of the information provided in the article, you could ask students how long it takes to recoup the "hybrid premium", the extra amount paid for buying a hybrid vs. a comparable traditional engine vehicle. Without the tax credit and with falling prices reducing the cost of driving, the payback time is stretching out. Questions for the students: Does this affect your decision-making when buying a car? Would taking a long-term view about energy prices in general change your decision?

The second article reports on the fact that the economic slowdown is causing a shift in consumer behavior in the supermarket. In an effort to stretch their incomes, people are abandoning brand loyalty and going with cheaper brands or store brands. Questions for the students: Can we graph this behavior to get a better sense of what's going on? Are we seeing shifts in the demand curve or movement along the curve?

What do you think? Are there other ways to use these articles?


Mike Fladlien said...

i think you are seeing both a change in demand and a change in quantity demanded at the grocery store. my reasoning is that expectations of a prolonged recession has shifted the curve while the substitution effect has movemed us along the curve.

rdan said...

Great catch!

Stiles said...

i think that until Hybrid Cars are made more efficient and easily accessible, then people will continue to choose traditional cars.

Stiles said...

I think until Hybrid cars are made more economically efficient, then people will continue to choose tradtitional cars.

Andrew Bez said...

To the first comment: I do believe that people will at first not want a hybrid because of the high price of the vehicle and the low price of gas. Later on though, when the price of gasoline might raise again, people will change their minds and go with the hybrid. To the second article: Price does affect people, but people just need to spend their money wisely. I see people in the morning everyday at Starbucks buying their five-dollar coffee. If people set their priorities straight, they would save more of their money. But the demand shifter, it is a shift in demand, since prices are rising and the quantity demanded is ambiguous, the demand surve must be shifted.