Demand and Supply

Ralph Turvey

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000579956
• Edition: 1
• Topic: Economics
• Subtopic: Macroeconomics
• Index: Economics

First published in 1971, Demand and Supply is an introduction to the economics of resource allocation, often known as micro-economics. Ralph Turvey examines how the economy really works and does not just give the economists' textbook version, which oversimplifies technology and exaggerates the importance of prices in adjusting supply and demand. Instead of offering theoretical diagrams and imaginary examples, he refrains from expounding those ideas that cannot be simply demonstrated or applied. But he includes sections on retail margins, urban land values, and the value of time – topics rarely dealt with in beginner's books. Some examples of the examples are: university teachers' pay; cotton spinning costs; pricing of tin cans; demand for farm tractors; newspaper economics; competition in the bus industry. This is the kind of economics used in practice and rests on down to earth fact finding. This book will be useful for both general readers and A- level and first year university students.

Chapter 1 CONSUMER DEMAND

DOI: 10.4324/9781003283225-1

Laymen sometimes use the word ‘demand’ to mean purchases or orders. In either case they are thinking of a single figure of, say, packets per month or tons per year. The economist, on the other hand, uses ‘demand’ in a special sense to indicate the whole set of factors determining purchases or orders. For him, demand is thus a relationship between the things that determine purchases on the one hand, and the amount people buy (or order) on the other. What interests him is the nature of this relationship; he asks what changes in what determinants will have which effects.

1.1 The demand for margarine

As an example, consider the demand for margarine. We could examine the demand for just one particular brand, such as Stork, but let us consider margarine in general. Fairly obviously, its demand is related to the demand for butter. Indeed if we look at Diagram i it is evident that consumer purchases of margarine plus butter taken together have been much more stable than consumer purchases of either taken separately. So one way of examining the demand for margarine is to look at it in two stages:

CONSUMPTION OF YELLOW FATS Index: 1970 = 100

• - Demand for margarine plus butter;
• - Share of margarine in this total.

The first stage involves looking at the demand for yellow fats. Eating habits are clearly an important factor here; presumably one reason why Americans buy less yellow fats per head per year than we do in Britain is that Americans do not eat bread and butter as much as we do.

The second stage involves more economics, so let us look at it in more detail. We do this by considering a number of factors which determine the share of margarine in total United Kingdom yellow fat purchases one by one. This involves supposing all relevant factors except one to remain unchanged, assuming the one we are concentrating on to alter, and enquiring how this will affect purchases. Thus we may ask: ‘Other things equal, how will a change in the amount spent on advertising margarine affect total margarine purchases?'

This sort of question makes people tease economists for always assuming that other things remain equal when in fact they rarely do remain equal. But the assumption is just a scientific method of sorting out ideas, not a description of the world we live in. So we too shall take one thing at a time.

Our ‘first thing’ determining the demand for margarine versus butter is consumer preferences. This is a shorthand expression for the mixture of circumstances, habits, attitudes, likes and dislikes, knowledge and ignorance which dispose consumers towards the one or the other. Manufacturers spend a great deal of money trying to find out about consumer preferences so that they can tailor their products more closely to what people want. Since what they learn would help their competitors, they keep it secret and we can only guess at some of the facts they may have discovered.

A modern businessman would probably put down ‘marketing’ as the second factor determining the share of margarine. By this is meant the formulation of the product, its packaging, incentives to retailers to display it, advertising and so on. The practical business point is that these are all planned and decided together as part of a coherent policy to promote purchases of the brand. When a new brand is introduced, a big advertising campaign is required to launch it and retailers have to be persuaded to stock it. But all the same we can list some of these elements separately in our one-thing-at-a-time approach and put down the characteristics of the product including its packaging - as our second set of factors determining the division of the yellow fat market between butter and margarine.

In this particular case the characteristics of the product have not been stationary. New brands have been introduced with new characteristics. Some time ago, margarine was just a cheap alternative to butter. But some of the new brands that have been launched over recent years appeal by virtue of their differences from butter, such as spreadability and convenient packs that can go straight on the table. These developments reflect research, both (as mentioned above) into consumer wants and into new ways of producing margarine. It is possible that it is these changes which explain the recent rise in the market share of margarine shown in Diagram i.

Such changes through time in the quality of goods are easy to forget when we look only at total amounts as in the diagram. But a great deal of competitive effort in modern business is devoted to studying and trying to meet the preferences of consumers, and the economist who ignores it is neglecting a very important feature of the markets for consumer goods.

Our next factor is advertising. Other things equal, increased expenditure on advertising margarine - or decreased expenditure on advertising butter - will increase purchases of margarine at the expense of butter. It is perhaps a little less obvious that advertising affects sales not only via its effect on consumers but also via its effect on retailers. Their willingness to give space to Brand X may be increased if widespread advertising of it makes them feel that more customers are going to try it.

The main point to be made about the effect of advertising upon sales is that it is an effect which is extraordinarily difficult to predict. Indeed anyone who could make accurate predictions would rapidly make a fortune! To see how difficult it is, just consider all the links between the expenditure on a tv advertisement and its effect in stimulating purchases. The size of the tv audience at the time it is shown can be predicted fairly well and is in fact reflected in the cost of showing the advertisement. But how many of the audience will actually take in the message, how many of these will remember it and how many of these will actually buy who would not have bought if they had not seen the advertisement? Advertising agencies do serious research on these matters, but hunch still plays a major role. After all, there is no way of measuring the quality of an advertisement in advance of showing it.

Both margarine and butter are very widely available. So it is just for the sake of completeness that we add that the number of retail outlets counts too. If margarine were on sale at only half as many shops as butter was, margarine purchases would drop.

Next comes income. Its importance can be shown by figures from the 1977 Family Expenditure Survey showing the average weekly expenditures on butter and margarine by families of two adults and one child for families with different income levels. Expenditure is measured in pence.

1977 EXPENDITURE OF HOUSEHOLDS ON YELLOW FATS BY INCOME GROUP

Household weekly Income	£20 and under	£30 and under £35	£60 and under £70	£100 and under £110
Weekly expenditure on butter	25	31	36	43
Weekly expenditure on margarine	8	13	19	19

The pattern is not perfect, but it seems clear that the rich either buy more butter or buy higher quality butter (or both) than do the poor. As regards margarine, the tendency is the opposite. Since it seems unlikely that those who are well-off buy cheaper brands than those who are not, the tendency for expenditure on margarine to be lower when income is higher must mean that the quantity purchased is lower.

Margarine is not the only food which is bought in smaller quantities by those who are better off than by those who are poorer. Potatoes constitute another example and bread another. As living standards rise, people are able to afford a more varied diet and therefore concentrate less on such staples. In other words it is true both (i) that at any time the rich, on average, eat less bread than the poor and (ii) that as people in general get richer as time passes they eat less bread. Between i960 and 1977 total bread consumption fell by one-third in the uk. Goods such as bread are technically termed ‘inferior’ goods by economists.

The final factor affecting margarine purchases, and the one which most excites textbook writers, is price. Since margarine and butter are substitutes it is only common sense to say that, ‘other things being equal’, purchases of margarine will be stimulated either by a fall in margarine prices or by a rise in butter prices.

It would be nice if we could demonstrate the importance of prices by showing that margarine purchases have fallen and butter purchases have risen when the ratio of margarine prices to butter prices has risen. The Family Expenditure Survey for 1977 does indeed show that this has, by and large, been the case as the relative price of butter and margarine has varied over recent years. However, this cannot be regarded as definite evidence for the argument because ‘other things’ were not equal - that is to say the number of varieties and levels of advertising of butter and margarine have changed considerably in recent years. Thus the probable price effects are very difficult to quantify, and have sometimes been offset and sometimes strengthened by advertising; by the introduction of new brands; and by the gradual rise in real incomes. From 1968 to 1969 the average price paid for margarine by the eight thousand-odd families covered by the National Food Survey rose by one penny, while the average price paid for butter was almost unchanged. Yet the margarine share in total yell...