Business Economics GM545
Fall 2013 Session
Back in 2005, the housing market was at an all-time high. The demand for houses was growing even while prices were jumping. However, one of the determinants for demand was not due to income rising, it was due to unethical business practices by mortgage companies. These mortgage companies would lend money to borrowers who couldn’t afford the loans due to the terms of the contracts. Then in 2008, a bubble was burst. The housing market began to fall because of the rise of foreclosures. Homeowners began to realize they were unable to afford the homes they were in. Let’s take Countrywide Financial for example; they were being prosecuted by Attorney general of Illinois, Lisa Madigan, in 2008 for unethical business practices. Madigan alleged that Countrywide knowingly put people in unaffordable loans by exaggerating their income. In addition to seeking damages from Countrywide, the action targeted the company's chief executive Angelo Mozilo and demanded that he contribute personally to damages. “Madigan said Countrywide's unfair lending practices have harmed tens of thousands of borrowers who've been placed in unaffordable loans and, as a result, our communities are now being destabilized by a skyrocketing number of home foreclosures”. At the time of the housing boom, I would think as home prices go up, the demand would decrease. It was the opposite effect. During this time demand was inelastic. After the dust has settled in present day, demand has become more elastic; however there are still more sellers than buyers. It is unfortunate because this has happened before in history and we have yet learned from our mistakes.
Equilibrium is the state where economic forces such as supply and demand are balanced and in the absence of external influences the values of economics variables will not change. Equilibrium occurs at the point at which quantity demanded and quantities supplied are equal. In the case of Starbucks creating a new premium coffee, the rise in demand is probably due to the tastes and preferences changes. Tastes and preference changes are determinants of demand. In the coffee market, as the demand increases, equilibrium price and output grows. Starbucks will raise prices as they see there is bigger demand for their products. When demand alone changes, the effects on both price and output can be determined. If a hard freeze eliminates the crop from Brazil, I would advise Starbucks to shift their attention to something else. However, when the supply declines, the equilibrium price rises along with equilibrium output falling. It will become more difficult for Starbucks to produce more premium coffee for their consumers. This will cost them money in production and eventually force them to raise prices. As the prices raises, the demand for the premium coffee will begin to fall as consumers will look for substitutes like McDonalds.
In the potato chip and computer chip industries price has different effects on the demand of that market. To measure the responsiveness of the markets to the price changes, we must use the elasticity tool. “All products have some…