So let's go ahead and get started. So in terms of announcements, my office hours are listed, or student hours are listed up here for this week. We're actually moving into Chapter 8 of the textbook. Sorry, a chapter is blank.
If you read between the words, it says eight. Our next lab session is on Thursday and Friday. We do have lab homework.
Lab homework five is due then. If you need a copy, they're up here. You can pick them up at the end of class.
And tutoring starts up again this week. So we'll have regular tutoring Wednesday and Thursday. Questions on anything?
How many of you went to the games? It was a good game, wasn't it? So, today what we're going to do is continue our exploration of consumer behavior, looking at market demand. The first thing I want to do is kind of review, get everyone on the same page. And so, we're looking at consumer behavior.
Why we look at consumers, we spend a long time on firms. For consumers, they're the ones who purchase the goods and services firms make. And we capture this behavior with what we call demand.
This is consumers'willingness and ability to pay for a good in the market. We say that demand is the relationship between that quantity we call quantity demanded of a good or service and the market price. We can write that functionally as quantity demanded as a function of price or quantity demanded, that amount of consumption is determined by price. Remember that also goes the other direction.
Price is determined by consumption, okay, or quantity demanded. And so they're both dependent on each other. In essence, another way to put that is they're both dependent variables, okay? They're simultaneously determined. You can't get one without the other.
And so They both influence each other directly. And so we see that relationship and we start examining that. We looked at ways to represent demand. One way is that for an individual is the demand schedule. That's just a table.
It's similar to a production schedule except for demand. It tells us the prices in the market and how much an individual would be willing to purchase of that good at those different prices. Okay.
We then say, well, how do we get to market demand? Market demand is simply the sum of everyone's individual demand for a better service. So in this case, if we have 1,000 identical consumers, we add this table up 1,000 times.
But since they're identical, we can multiply it. We get market demand. So if you add 10 up 1,000 times, you get 10,000.
And that's how we get to these quantities. And we're literally just summing up individual demand. And that's how we get it at market level.
It's just summing what everyone's willing to buy at a given price. And so we can represent individual and market demand using a demand schedule. One of the things to remember is this demand comes from individual behavior. It's that individual maximizing their utility subject to a budget constraint. which gives rise to this table.
So it's consumer behavior that gives us this. It's that individual behavior summed altogether at the aggregate, which gives us this. So like with firms, it's going to start at the individual level, and we can graph that market demand schedule as a demand curve. The market demand curve is just a function or a curve representing all combinations of prices and quantities. Here, quantity demanded for a good in the market.
Because it's a graph with only two variables showing, we assume setters and pairs. Everything else not in the graph is held constant. The only two things changing here are price and quantity. We saw in the lab...
We assumed what a linear demand curve looks like, but is demand linear? Likely not. Demand is most likely going to be nonlinear, really because preferences change, and they're linked to prices.
Actually, when prices change, our preferences change with them. And so that causes these demand curves actually to be different shapes. Likely not linear. To keep it simple, we're going to keep them linear.
But one thing that is common is demand curves almost all the time are downward sloping. That means price and quantity demanded are inversely related, which gives us the law of demand. The quantity of a good demanded...
varies inversely or negatively with the price of the good. Ceteris paris. Okay? And so this is one of our fundamental laws in economics.
And that's kind of where we ended last time. Questions? So what we want to look at today is some behavior of the demand curve. We're going to spend our time more looking at that demand curve. And so remember the demand curve, we always have quantity on the x-axis, price on the y-axis here.
And we have a downsloping demand curve. The two things I want to start with are terminology. We have what we call a movement along the demand curve.
So if you move from one point, so if price changes. So if I'm looking at the... Say the market for shoes, and this is the price of a pair of shoes and the quantity sold or consumed.
If the price of a pair of shoes changes, you move along the demand curve from point A to point B. Sometimes we call this price, so if we're looking at a market like for shoes and we're looking at the price of shoes, we sometimes call that price the own price, meaning it's the price in the market we're examining. So if it's the market for cattle, it would be the cattle price. If it's the market for soybeans, it would be the soybean price. That's the own price.
If the own price changes, the demand curve already tells us what happens. That is the relationship between price and quantity. And so it tells us if I'm at point A and the own price drops, I'm going to move to point B.
In terminology, we call this a change in quantity demanded, because it's just the movement along the demand curve that's already been established. And that's important, okay? Because now we're going to talk about a change in demand.
And I can tell you, if you watch this on TV, people get it wrong all the time. Economists, when they say change in demand, means something very specific. A change in quantity demanded assumes a movement along the curve because all that's changing is this price.
Setter is Paribus. Everything else in the world's health constant. The difference is when we have a change in demand.
A change in demand moves the entire curve. So remember in the graph, we assume what? All other variables are held constant, right?
Well, demand itself, demand for a good or service is not just a function of price. A lot of other factors influence demand. Prices of other goods, cost of inputs. Well, not cost of inputs, but some costs will come in there. Taxes.
population, okay? They influence, but they're held constant. Remember, they're not in this graph. This graph is quantity and own price, the price of the good we're looking at. So for the market for shoes, that's the shoe price.
But hey, what happens if you're buying shoelaces? And say they're fancy shoelaces, so they're expensive. Well, if the price of those shoelaces change, Well, that doesn't show up here, but the demand for shoes is also dependent on them.
So how does that come in? How does that manifest? How does that come into being? How do we show that?
It's a movement in this curve. And so in essence here, that curve, if it's an increase in demand, it's a shift of that entire curve to the right. And so what happens is... So what happens is when we have a change of another factor not represented in this graph changes and causes an increase in demand, that entire curve shifts right, generally. Okay?
And it shifts right because at every price, we now will consume more. Quantity demanded will go up at every price. So that entire curve shifts.
And we're going to represent them simply as parallel shifts. We're not getting into the actual modeling of demand. If you want to get into that, take our higher classes.
Because the curves, as you saw in the lab, these shifts can shift, but slopes can change too. Meaning it can shift and then get steeper or flatter. Meaning at the end, they could cross.
We'll talk about that a little later. But we're just going to represent these with parallel shifts to keep the story straight. And so for now, an increase in demand is a shift in the entire curve. It's a movement of that relationship given by this graph between the own price and the quantity demanded for the good we're looking at to the right. Correspondingly, a decrease in demand.
is a shift to the left toward the origin. And I would recommend using the terminology shift to the right, shift to the left. Some people say up and down, that can be misleading.
And so kind of to summarize, a change in demand, quantity demanded. is a movement along our existing demand curve. Because the existing demand curve gives us a relationship between own price and quantity demanded. So we just moved to a different point.
If some other factor that is not own price changes, remember, it's held constant. If some other factor comes in and changes out in the world, that causes the demand curve to shift, move to another location. Okay?
And an increase, if we say it causes an increase, it shifts to the right. A decrease shifts to the left. Questions?
This is one of those more, we're going to go through examples and stuff like that, but this tends to be one of the more confusing kind of terminology delineations we make. Please ask questions as we go through. Kind of see if you got what we talked about. An increase in the price of bread will do what?
So how many people think it's B? How many people don't know? You can go like this. Or just go out behind your neighbor with some rabbit ears. B is correct, right?
Law of demand tells us what? An increase in own price or the price of bread causes consumption to go down. That's law of demand. They're inversely related, price and quantity demanded. So this is the own price.
So it's just a change in quantity demanded. If it was any other factor, any other price or anything else, it would be a shift in demand. Okay? So what's the difference between B and D?
D is the shift in the curve. When we say a decrease in demand, that entire curve shifts left. B, we just move from one point to another point on the given curve. We're just moving to a new coordinate, new combination of price and quantity demand.
So what we want to look at today are determinants of demand. So all those other factors that can change demand, we call... determinants of demand. Simply put, it's everything that's not the own price that can change demand. So we're going to look at five of them.
Prices of related goods, tastes and preferences, expectations of future prices, population, and income. And these are what cause the demand curve to shift. So at the end of the day, you might ask, why do I care about demand? Because companies that sell products have marketing departments. Their job is to know this, to predict what happens when market trends shift.
What should we do with our production planning? Should I produce more or less product? How do I think about prices or what to expect from prices?
And there's a lot of companies that assume their demand this year will be the same as last year. And that means they miss out on a lot of opportunity. And so good companies have marketing departments that have business or economists.
that actually go out and estimate demand. They try to actually figure it out. And it's not an easy task, but it can pay off significantly.
So let's look at these determinants. So the first determinant is the prices of other goods. So remember in our lab, that second example, the second exercise was complement or substitutes.
That's what we're getting at here. So the first example are substitutes. So the prices of other goods related to the good we're looking at can shift demand. And so that's saying that the demand for a particular good is dependent on substitutes, things I can buy instead of that product that could replace it.
So substitutes in consumption are goods that are consumed either or. They can replace the good or service. we're looking at.
Can you name some examples of substitutes in consumption in the ag? And there are lots. Is the other white meat? Yeah pork or chicken right?
Heck pork or beef? Chicken or beef? Fear or case? Deer case implements, yeah, or tractors, machinery, different companies.
What else? Roundup versus generic, like I say. Yeah, roundup versus generics, right, and inputs. Hey, farms are do consume.
Those are still substitutes in consumption. There's lots of examples. We named one plastic versus paper bags. Wheat versus rye, crop, substitutes.
And so these are things that replace each other. We tend to buy them either or. We don't buy both. And so when we look at substitutes, as the price of a substitute in consumption decreases, the demand for the current good or service decreases, and vice versa.
In essence, though... If I'm looking at chicken and pork, and I'm looking at the market for pork, if the price of chicken goes down and there are substitutes, if the price of chicken goes down, what are you going to buy more of? Relative pork or chicken? Yeah, you'll start buying more chicken. It's cheaper relative to pork.
Remember, relative prices are what matter, right? And so if you're switching to buying chicken now, what happens to pork consumption? It goes down at all prices. And so what happens here? What happens to the demand curve?
Yeah, the whole demand curve shifts to the left or to the north. We get a decrease in demand. And so in this case, it all shifts down. Another example is the market for gasoline.
The price of ethanol decreases. It becomes more attractive to consumers. as a substitute or alternative for gasoline. This is particularly true, we've tried to do this in the U.S., but it's very true in Brazil, where like 90% of their fleet since 2006 is flex fuel. They can use any amount of ethanol or gasoline in their vehicles.
So the quantity demanded for ethanol, so if the price of ethanol goes down, people in Brazil switch to ethanol. It's cheaper. They start putting more ethanol in their tanks.
This results... at any given price of gasoline, gasoline consumption will go down. And that's a shift to the left of this curve.
Questions? The opposite of a substitute is a complement. These are goods that are bought together or consumed together. Examples of substitutes? Peanut butter and jelly.
Cereal and milk. Cake and frosting. What are others? If you have a car, what do you have to have on it? Tires and cars.
Or trucks. Or tractors. They're important. It's case, treads. What are some other examples?
Shoe and socks. What? Shoes and socks. Hopefully.
As long as you're not wearing sandals, then it just looks weird. But some people like that. Shampoo and conditioner.
Shampoo and conditioner. Yep. Unless they come together already.
Hey, they have them. I don't like the mixed one, but you can get them. What else?
Toothbrush and toothpaste. Toothbrush and toothpaste. Right?
College classes and textbooks. At least as professors, we hope so. But they're compliments.
I don't think people go out and buy textbooks at random. I mean, unless you're an academic, people don't go buy random textbooks. Hey, let's go learn out about behavioral psychology today.
Yeah. They're not high-selling books. I think I only know of one author who wrote an econ textbook. George Banke writes the most widely used textbook for high school and for college. He sells hundreds of thousands a year of college textbooks.
He got a million dollar advance to write a high school textbook, and it's now the most widely used high school textbook in the nation. The small, most people, you never make money with textbooks. Very few, some people do, but you've got to be that.
That textbook person where everyone uses your book. Something like 50% to 60% of all econ classes in the nation use his books. That's a lot.
So as the price of a compliment increases, the demand for the current Twitter service decreases. Why is that? So let's take an example. Another example is cigarette lighters and cigarettes.
Yes, we use cigarette lighters for other things. primarily for cigarettes. Okay.
As the price of cigarette decreases, consumers buy more cigarettes, right? This increases the need for cigarette lighters, meaning at every price, the demand, people will buy more cigarette lighters because they need them for their cigarettes. And so demand changes for cigarettes, which it shifts, right?
Does it shift to the right or shift to the left? Yeah, this is an increase, right? And so it shifts to the right. You can do this example with a cake and frosting.
If you're looking at frosting, the price, the market for frosting. and the price of cakes, or just say cake mix, right? If the price of cake mix goes down, do people buy more cake mix or less?
They buy more, law of demand, right? Tells us if price of cake mix goes down, law of demand, consumption of cake mix should go up. If people are consuming more cakes, what do they need?
Frosting. Because cake without frosting, unless it's the right kind, you need frosting. Especially for box cake mix.
Half of those are you need good frosting. There is bad frosting, I'll tell you that too. My kids can make bad frosting.
I guess my question would be if it's a complimentary item, any strict, but it's always going to be priced in some way. of cigarettes then when cigarettes make what appears to be a move along the demand curve how come our cigarette lighters are shifting on the demand curve rather than just moving because at any price they'll start buying more cigarette lighters to make up for that increasing consumption of cigarettes okay all right i mean i guess we did say it's not tied to the price right yeah because the price here is for the price of cigarette lighters not the price of cigarettes So in the cigarette lighter market, this is the price of cigarette lighters, not the price of cigarettes. The price of cigarettes, does it show in this graph? No, it's not here.
We're holding it constant with this graph. So if it changes, that's manifested. That comes about with the movement in this curve.
It redefines the relationship between the price of cigarette lighters and the consumption of cigarette lighters. And so it moves it out. By how much?
That might come into play if other factors play into it. And so we don't know how much, we just know it shifts out. And that's all I would conclude. That's about as far as we go. If you want to predict the movement, we're not going to say the magnitude itself.
And so for the cake example, if we're consuming more cake, we want more frosting, right? That's likely we're going to buy more frosting at a whole bunch of different prices. And so that shifts that frosting curve out as well, that frost demand curve.
Other questions? Is this sinking in a little bit? I'm not getting tears and headlights.
So, okay. Ask, please, because if you're wondering, someone else is thinking it too. Or feel free to email me or come to tutoring and ask. But please do. It's safe to ask.
I'd rather have you ask here, because what I tend to find is about 15, 20 other people have given me questions. And I was in big classes and I didn't want to raise my hand either. But then I never got, sometimes I never would get my question answered down the road.
And that can be frustrating too. Taste and preferences are another determinant of demand. So taste and preferences can cause the demand curve to move as well.
Basically, this works by an increase in the preference for a good increases demand. A preference says we just want to buy more. We're going to buy more at every price. And so it increases.
We get a shift in demand outwards. So as an example, consider food safety issues. This is a big one. They're really interesting, too, to look at from an economic point of view. So an outbreak of E.
coli for peanut butter is likely to have what kind of effect on the demand for peanut butter? A what? A decrease, right?
So if I told you, hey, did you know all the peanut butter in our local thing was pulled off the shelf because of E. coli, how many are you going to go back next week and buy peanut butter? Yeah, right? And so we get this decrease in demand. And so from a common sense point of view, hey, if you don't prefer something, you're not going to consume it.
It doesn't necessarily matter the price. Or separate from the price, it's going to decrease. And so in this case, we get a decrease in the demand for peanut butter. We see this a lot. When there's big recalls, demand plummets.
The last, I know like a few years ago, Skippy, there's a reason I put a picture on, they had a massive national recall. Their sales tanked for like a month. What do you think happened after that month?
What? No, yeah, bounce back to what it was before. What's really interesting about boom safety recalls is we get this massive drop off in demand.
It goes down, but then it pops right back up. People forget about it. They tend to recapture their demand in about a month's time.
In about two weeks, we see it be a big rebound. Three, four weeks, we're probably back to where we were prior to the outbreak. Did you see that? Cars?
I haven't looked at cars, so I don't know. But my guess is it's not widely. sent out enough unless there's like big halibuts that may be the one that drugs cars Like all of us gotten if they said hey dodge rams are blowing up randomly and um a hundred of them have blown up in the last month people all of a sudden would take notice but it takes yeah well Boeing's different Boeing's different the Boeing's a plane safety issue but and that was two incidents yet we think all Boeing planes are unsafe and it was two incidents.
Don't get me wrong, pretty significant because of the amount of life in one incident of the plane, but even with those incidents, flying is still safer than driving. It always has been. With all the accidents and all the nastiness that has occurred in air travel, statistically it's safer to fly. You're more likely to have a car accident kill you than dying in a plane. price so the question was if this goes down so if we get a decrease in demand of e coli do they lower the price and increase consumption they will they might or they might have a big sale right hey what's a good way to get people to buy my peanut butter peanut butter again hey look it's 20 off come back to skippy or hopefully peter pan has an e coli outbreak I can only imagine what the CEOs are thinking about their competition, but that would help them.
Oh, no, it's the next brand. So we're going to go back to Skippy. Really, at the end of the day, consumers do have, for some things, a very short time horizon in which we think about and retain. This is one of the more difficult ones to kind of capture. Expected future prices.
So when we look at demand, we're talking about the price today. It's the present price. It's not the price in the past or the price in the future.
So when we talk about expected future prices, this is of the own price. So when we're talking about the market for shoes, the demand curve we show you is for the price of shoes now. If we're talking about...
the price of shoes six months from now, that's a determinant of demand. Okay, so demand is, it's remember at a given time and location, and it's usually today. Okay, and so expected future prices have a huge impact in markets, especially in ag.
We deal with them all the time. And so we deal with how do future prices change, hence why we have future contracts. and we pay attention to those in commodities, a decrease in the expected future price of a good will decrease the demand for that good today.
Why? Because if we expect the good to be cheaper, so if you're buying a television, and you walk into Best Buy, and they say, hey, at Thanksgiving, it's going to be 40% off. Are you going to buy it today or wait until Thanksgiving?
You'll wait till Thanksgiving. That's an expected future price. So all of a sudden, if they're advertising that, we expect a huge sale to Thanksgiving and we know what it's going to be, we'll decrease our consumption of TVs today.
So demand will decrease today. At a given price, we'll get a shift to the left. This plays a huge role in that because it impacts a lot of markets. We make decisions on what to plant. and the enterprises on our farms based on expected future prices.
And so, these do impact us. For example, consider the market for corn. A biorefinery is a consumer of corn.
They buy corn. What do they make it into? Ethanol.
Over a third. Ethanol is the single largest use of corn in the U.S. peaked at about 40%. I believe it's gone down a bit, but it's like 35 to 40% of our crop.
Corn crop goes to ethanol. A third goes to industrial uses, and a third is for food uses, like high fructose corn syrup, if you've ever heard of that. But a biorefinery, they want to contract with farmers now to purchase their corn for ethanol production at the end of the growing season. Okay?
And they want to do it at the current market price in March. So what they try to do is help with their risk management. and to avoid price fluctuations, they contract a certain part of their consumption.
And so they go to farmers and say, hey, I'll contract with you. I will guarantee you this price now to purchase your crop when you harvest it. Okay?
And so they lock in current prices. They might have mechanisms that allow that to fluctuate based on the market, if there's massive market gains. But in essence, if there is market gains, the refineries saved a little bit by paying lower amount.
But from the farmer's perspective, if the price of corn is expected to increase by October, well, this is from the refineries perspective. So they want to lock in the price now in March, beginning of the season. If they expect the price to increase by October, what would be the likely effect on the number of contracts offered? Another way to ask this is, how aggressive do you think the refinery is going to be if they know the corn price is expected to double in October if they're signing contracts in March and locking in the price in March at that price? When do you think they want contracts signed?
Yeah, they want it done now. So an increase in the future price says, hey, lock in consumption now. They're locking in those contracts. which is in essence guaranteeing their consumption at this point in time.
They're not going to get it until October, November, but they're stockpiling all that amount to make sure they have it. And so they do this with 40% to 50% of what they buy or more. There are cases here where companies do this, have to do it 100%, but it's a risk management tool for them.
And it can also be for producers. The producer side is a little different. But producers, do they want to, if you think of the production side, do they want to lock in? No, not unless there's a guarantee that if the price does double, this locked in price has some mechanism to go up to give them some of that share. So they'll take a lower price, but not quite as much as they would have if it was locked in.
We'll talk about contracts a little bit later in the semester. But this is a case. where they're going to increase the number of contracts.
The demand for corn today is going to go way up, especially projections come out saying the prices could be a lot more expensive at the end of the season. So the current demand for corn will increase. And this is an expected future change. So we deal with tons, we have commodity markets, that's what these are, they always fluctuate because of expected future changes. Gold, oil, all of our crop commodities, land, another commodity, huge investment commodity actually, especially in recession times.
A lot of people turn to ag and land. It happened in the last financial crisis. Commodity markets became highly volatile.
They haven't changed since. It's because a lot of people who were in the stock market and stuff when it was tanking moved to commodities. And they started investing.
Half of the, where it was like 20% was speculative, meaning they were just buying and trading, never expecting to deliver on contracts. Through to 50% of all trades. And so volatility started massively swinging. We still see it today.
That was from 20 years, 15 years ago. It changed our markets. Did everyone get that?
So consider the market for bonds. Consumers purchase bonds at a flat rate. The demand for bonds varies by the interest rate you receive on the bond.
For example, if you buy a 110-year bond at a 10% interest rate and you pay $100 for the bond, so you invest that $100. It's your money. You're just... putting it away for a while.
It's like a savings account. So this is still yours, but you invest, you buy a bond, you pay the $100, you get 100 times, what you get back is 100 times 1 plus 0.1 raised to the 10th power. It's about $259 in 10 years. So when the bond matures, that's what they pay you.
So you get your original $100 back and $159 in interest earned. And so this is assuming it's compounded annually. So the price of a bond itself is the interest rate.
That's what drives buying and selling a bond. It's what you earn on. And so, in the bond market, as the interest rate increases, the quantity demanded for bonds goes up.
It's a little different from what we usually do, but since, remember, you're investing your money, right? If you earn a higher interest rate, you get a bigger return, you want, you're going to buy more bonds. You'll put your money into the investments that make you more money, right? That's because of higher interest rates.
because you're earning it. In essence, bonds are loaning money from people to companies or municipalities or government. So as the interest rate goes up, people buy more bonds. Consumption goes up.
If the expected interest rate on treasury bonds is expected to decrease in the future, meaning it's which is what's happening now. If we expect the interest rate to go down, what's going to happen to the demand for bonds? It's going to go.
It'll go, right? Well, what's going to happen to the demand for bonds now? In the future, you'll purchase less bonds and bring those down.
But what happens today? Yeah, people are going to buy more bonds today because they get a higher interest rate than they would if they bought it in the future. So an increase in the interest rate will increase the quantity demanded. But if the interest rate in the future is expected to decrease, people will buy their bonds now.
You put your money away now rather than later and get the higher interest rate, which means at the end of that 10 years, you get more money, more moolahs. That's what we want. Believe me, I don't, I don't, bonds are not a phenomenal, they haven't been a phenomenal investment in a long time. They're safe.
U.S. bonds are safe. but they're not a phenomenal investment. We have paid our debt, so bonds are safe. We're probably one of the safest still, even with all the talk and uncertainty around our budget and stuff. But what's interesting is trading of bonds, but that's a different story.
One of the other determinants is population. This one's straightforward. As population increases, demand increases, and vice versa.
More people means more consumption at all prices. Less people, less consumption. This is something they're starting to worry about, actually.
Depopulation. Some of the population models in the world have predicted in 300 years the world population will be a billion people. We expect to cap it about, they thought we were going to go over 10 billion.
They're now thinking we won't hit 10 billion. That's where we'll be. And then we'll go down.
And some models have predicted a steep decline. I don't know if it's that. The 1 billion is an alarming model, but people are depicting we're going to go over the hill and start declining.
And so that has impacts, right? Income is one of the other determinants of demand, and it has a significant impact. Next to prices, income is probably the other big one. Remember, our demand is determined by an income constraint, and so income plays a big role. The types of services consumed by rich and poor differ significantly, and so our standard of living impacts our consumption.
Usually, as the standard of living increases, demand increases for more differentiated products. So as you move from least developed countries to the more developed countries, you get a much differentiation in the goods available and how much differentiation we want. A big one like China right now is consuming a lot more wheat and a lot more meat because of their growing middle income or middle class. So developing countries with a lower standard of living, something else that happens is we find people or households spend a larger percentage of their income on food or basic staples.
But as the income or the standard of living increases, spending as a percentage of your income shrinks. So what's interesting is we spend a lot more money on food as our income goes up. You'll know this when you get your first job.
You'll change a lot. No more ramen, Totino's, frozen. meal you're like hey i'm going out or i'm going to actually cook right quality goes up We tend to find as income goes up, we increase our standard of living accordingly. But we spend a smaller percentage on food than someone compared in a developing country. So we purchase better food products and more income is actually spent on non-food items or durables such as electronics, vacations, leisure activities.
Ernst Engel, a German statistician, studied this relationship between demand and income, and his main findings came into one of our laws, Engel's Law. As income increases, the proportion of income spent on food declines, et cetera, et cetera. Well, this has had a massive impact on ag in the United States.
As we've slowly economically developed, What's happened to the percent of our economy that comes from ag? It's decreased. It's about 10 to 12 percent, depending on how you measure it.
It's ag-related. That's agribusiness, food chain, stuff like that. Restaurants, supermarkets, where it used to be over 50 to 60 percent. Same things happen with manufacturing.
So what does this mean for ag? Has it direct? As the standard of living goes up, the importance of agriculture in our economy actually goes down.
It's still important. We've got to eat, and it's still there, and it's even a growing industry. But as a driver of our output, it starts to shrink.
Currently, less than 2% of the total U.S. population is engaged in farming or tied to it. That used to be over 50% of the US population, less than 100 years ago. We've had a massive shift in the last 100 years. So income has an impact on how we look at demand for a good or service. And so we have different types of goods depending on income.
The first one is what we call a normal good. This is a good whose consumption increases as income goes up. So when we start earning more, we consume more of it. I tend to put pizza here. It's one of my favorite foods.
But boy, do I like better pizzas and more berry as my income goes up. Can you think of other examples of normal goods? Milk. Trucks are normal goods, right?
Lots of examples. Almost all the goods we consume, many are normal goods. That makes me hungry for lunch. Now you know what you need for lunch after you get out.
The opposite of a normal good is an inferior good. A good whose consumption decreases as income goes up. meaning we consume less of it as we start to make more money, is an inferior good.
I put Twinkies here. I don't eat them anymore. I read a book on what's in them, like 80 ingredients.
If you read the book, you won't eat it anymore. It's pretty amazing where all of it comes from. But other goods. Ramen noodles. For me, ramen noodles are an inferior good.
Totino's frozen pizzas or Totino's pizza rolls, an inferior good. Now I have a kid that'll make me homemade pizza roll. An interesting fact, and I'll end on this and we'll hit the other two definitions on Wednesday.
Real quick, before you tack off, an interesting fact to end on. Where do you think most of our... soluble vitamins come from so you get vitamins like vitamin b vitamin d some of our vitamins in our multivitamins so while vegetables are really rich source of those where do you think most of them come from in our multivitamins oil okay actually pull some of our vitamins directly from oil they're the most accessible learn that when i learned about how twinkies are There's products and Twinkies that come from petroleum, fossil fuels. Hey, they make Twinkies.
So have a good afternoon. As long as they match the flavor.