M2: Surviving and Thriving through Economic Downturns (Case Transcript)
Consumer behavior affects prices and quantities of goods and services both directly and indirectly through demand for substitutes and complements, and changes in income or other determinants of demand. Consumers may prefer home gardening to purchasing store-bought vegetables, for instance.
Consumer behavior affects demand for inputs. If consumers increase time at home, time spent at theaters might fall as a result of this change, while demand for substitute goods, like online entertainment sources like Netflix and Hulu, might rise. Theaters may reduce service personnel, while Netflix might hire production specialists, for instance. Concurrently, wages of theater service personnel might fall, while those of production specialists may rise.
Environmental or safety regulations limiting chemical emissions raise a firm’s costs at all prices, shifting its supply curve backward and to the left. Relative costs of labor versus other production “ingredients” also determines the quantity, price, and selection of goods produced. The relative cost of labor versus other production “ingredients” influences how (for instance, whether a good is produced by a robot or a human) and where goods are produced.
In late 2019, a virus characterized by sudden and acute respiratory arrest caused an unexpected shock to economies worldwide as it spread through communities around the globe. The virus was ultimately termed a “Pandemic (Links to an external site.)
” as millions worldwide became ill. Governments responded with policies designed to slow the spread of the virus. These policies may allow communities to build care and testing capacity and to develop a vaccine to build “herd immunity (Links to an external site.)
.” Policies implemented included social distancing (ensuring limited proximity to other community members) and “stay at home” or “shelter-in-place” mandates and/or other efforts.
Anti-pandemic policies caused behavioral changes that markets experienced as shifts in forces of demand and supply. Demand increased for five varieties of goods and services (WHO, 2020) including cycling, outdoor theaters (where movies are shown on a screen and viewers remain in automobiles), indoor fitness (including home gyms), and Do-It-Yourself (DIY) and crafts, including home cooking, gardening, and baking. Increasing reliance on local grocers was also noted. We can visualize an increase in demand as an outward or rightward shift of the demand curve. Quantity demanded in these industries will be higher at all prices. Simultaneously, supply in these industries increased. We can visualize this as an outward or rightward shift of the supply curve. Quantity supplied in these industries was higher at all prices.
Meanwhile, demand shifted away from substitute goods, including “crowd-gathering businesses,” such as indoor movie theaters, restaurants, and concert and recreational venues. For example, Chuck-E-Cheese, the Metropolitan Opera, Disney theme parks and American Airline all saw steep declines in demand. We can visualize these as inward and leftward shifts of the demand curve. Quantity demanded in these industries was lower at all prices.
You were previously employed in the restaurant industry as a nutritional advisor. As the pandemic progressed, you saw demand for your skills fall in the restaurant industry; you and many of your co-workers were unemployed, as many restaurants simultaneously cut their labor forces dramatically. A government spending package offered payments to unemployed workers, and you made the difficult choice to use stimulus benefits and zero-interest credit offers to start a business.
Assume that you own and operate a medium-sized business called “Ready Gardens” (a fictitious entity). You began building “home gardens” encased in wooden containers that can be deployed in backyards or apartment patios and balconies. Demand grew rapidly. You hired employees to assist with product construction, delivery, supply acquisition, promotion, distribution, and other areas. You relocated operations to center production in one rural community where excess warehouse space was available. Given the small size of this community, a relatively high percentage of the community works in your production facilities. This location has allowed you to produce at a relatively low cost. Driven by demand for your products, producer surplus is also high in this market. In considering your firm’s success, you realize that indoor plant growth has allowed your firm to meet existing demand for your products. Prices in this market remain relatively high in relation to your production costs, however you know this will change with time.
Indoor plant growth requires light bulbs that emit ultraviolet rays. The basement environment you raise these plants in is subject to excess radon, a colorless, odorless, radioactive gas. Your business also utilizes high levels of phosphate fertilizers. All these products or processes have been discovered to be carcinogenic. You were unaware of this risk until workers became ill. You are aware that a local politician is considering enacting legislation designed to mitigate this risk to the community.
Review the Case Background and assigned reading for Modules 1 and 2, consider the conditions that led to the success of your firm relative to competitors. Consider activities of the local community that could affect your firm’s success in the future. For the purposes of your response, you may also wish to consider a supply and demand framework similar to those used in “Introduction to Supply and Demand” and “Externalities” (McGraw Hill resources assigned in this module).
Take the perspective of the owner of “Ready Garden” and discuss:
One condition raising producer surplus, or the difference between the actual price the firm receives and the minimum price that a consumer would have to pay the producer to make each unit of output available.
One strategy the firm could use to increase its chances of future success.
(Hint: You are encouraged to review pp. 77-80 as you prepare.)