Portion of Income
Supply, Demand, and the Individual Consumers
Last Update: December 2011
||Basic economics focus solely on goods and price. The
graphs are always shown in the middle. This approach lends to some
misleading implications. Showing the graphs in the middle create the
illusion that the potential supply is effectively infinite - supply
can always rise to meet demand. Both analytically and intuitively
we know this is not true. Yet our graphs don't analyze the limits.
Ultimately an economy is about the citizens, not the goods. Yet the
graphs focus on the goods, not the citizens. We wish to start a discussion
in economics that recognizes the citizens as central and recognizes
the finiteness of resources.
Let's switch from focusing on graphs that ignore citizens and finiteness
to graphs that focus on citizens and finiteness. We'll start with
a simple graph that acknowledges that production costs (and resource
limitations) contribute to finite limits to goods. We compare three
Situation C on the graph correlates to the traditional supply demand
graphs used in popular economic debates. Situation C will allow
for multiple producers, competing products, and multiple options.
Situation C will allow both the producers to be happy with the profit
they make and the buyers to be happy with the deal they are getting.
But we don't always get this in real life.
In Situation B, the maximum the buyer can afford to pay is about
the same as the production costs. Production and transaction can
occur. But the producer will barely cover costs and the buyer will
feel tapped. The economy will tend to slow down as both producer
and buyer deplete funds. This is effectively what happens at the
end of a bubble. Neither buyers nor sellers can afford the price
of the transaction.
In situation A, (also shown on a traditional supply-demand graph) the
minimum cost of production is higher than the maximum that the buyer can
afford to pay. A transaction, and consequently production, can not occur
without one or both parties suffering a loss. This situation will typically
occur when resources become scarce. It also occurs after a bubble bursts
when neither the buyer nor the seller can afford the new price of the
Sometimes production costs are high. Sometimes resource extraction costs
are high. Sometimes resources are finite and competing demands for the
same resource are so high that resources can not be used to cost effectively
produce goods. When these things happen, we get situations A or B.
Related pages at this site
The Housing Bubble
Over the last 50 years of the twentieth century, housing prices
seemed to fit classic market theory. Prices fluctuated with supply
and demand. Like situation C, in our graph, suppliers were able
to produce large quantities with many variations. By 2002 a bubble
started forming. By late 2007, the bubble was reaching its end.
Situation B was occurring. By late, 2008, the bubble burst. Our
economy reached situation A. Sellers could not find a market price
that would cover their costs. Buyers could not find a price that
they could afford. The economy as a whole no longer functioned.
The housing bubble was exacerbated by commodity prices. Extraction
costs, shortages, and speculation all drove commodity prices up.
This limited what citizens could afford to spend on other desires
such as housing. For many commodities the potential for problems
still exist. Available sources are decreasing and extraction costs
are increasing. Should the current demand trends continue against
these increasing production costs eventually we will reach a situations
B and A where production can not occur as production costs rise
above potential purchasing funds.
|| The more common scenario is that some potential
buyers have enough funds to buy, and some do not. To address the consumers
instead of the goods, we seek to create graphs to represent how different
potential buyers will partition their purchasing based on income. Each line
represents a consumer's total income. The first line represents a consumer
earning about $22,000 and the last goes of the chart at the right for a
consumer earning about $180,000.
Consider the buyers shown on the chart. They range from near poverty to
near wealthy. The first consumer has a low income. He spends about 85% on
necessities and about 15% on comforts, as demonstrated by where his line
crosses the shading. The third consumer is middle class. He will spend about
30% on necessities, the middle 45% on comforts, and the last (top) 25% he
can use for luxuries and investments. You can read similar information for
the other consumers in the chart.
The black line on the chart represents the minimum production cost of a
specific good. We can see that the poorer two consumers on our chart can
not buy the item on a year's wages. The third consumer can but he would
have to give up 95% of his wages to do so. His opportunity costs would include
giving up necessities. The wealthiest consumer in our example would only
have to spend about 35% of his annual income for this item. This chart provides
a good starting perspective for considering how different costs will affect
consumers with varying incomes.
||But most items can be purchased with time. Either
a consumer can save until they have enough money, or they can take out a
loan. The question then becomes, how long will it take for the consumer
to pay for an item. So to represent the burden of purchase we create a chart
showing how long it will take for consumers to purchase an item. In this
chart, we will assume that necessities will be paid for before saving for
this item can start. (We can also create similar charts for necessities.)
By the time we get up to a $10,000 item (such as a down payment on a house)
it takes our near poverty consumer 10 years of responsible sacrifice and
saving to have the funds. The person at $100,000 could have the funds for
the same item in just 37 days. The person earning $1 million could purchase
the same item in just 4 days. We see that time to purchase (after necessities)
is key to understanding the burden of buying an item.
On the chart, each line represents a different consumer by his
income level. The lines start at the left side showing how much
time would be required for each consumer to purchase a $1000 item.
They end of the right showing the time needed to purchase a $100,000
If an item cost about $1000, it will take a person whose income
is just above the poverty line, about a year to save up for it.
It will take a person whose income is about $100,000 less than a
week to pay for it. Incomes over $1 million will require less than
a day to pay for this item.
||Traditional supply-demand graphs may be good for
discussing quantity and price. But they are not good for discussing how
those prices will impact the consumers, the citizens. So we proposed here
two alternative graphs to show the impacts on consumers. Had these graphs
been used during the first decade, economists and bankers might have realized
that with housing and commodity costs rising faster than incomes consumers
could no longer afford the goods. They would have known that the bubble
was due to burst. Ultimately this is what we need to know: how does the
cost affect the citizens?