Consumer Choice and Demand: Higher Price, Less Consumption

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Consumer Choice and Demand: Higher Price, Less Consumption. Randy Rucker Professor Department of Agricultural Economics and Economics June 19, 2013. How Much of a Commodity will Consumers Purchase?. Depends On: Tastes and preferences Some people like pink shirts, some like black ones. - PowerPoint PPT Presentation

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Consumer Choice and Demand:

Consumer Choice and Demand: Higher Price, Less ConsumptionRandy RuckerProfessor

Department of Agricultural Economics and Economics

June 19, 2013

#1MCEE Demand ELM, Rucker, June 19, 2013How Much of a Commodity will Consumers Purchase?Depends On: Tastes and preferencesSome people like pink shirts, some like black ones.Some people prefer cheap old cars and big houses. Others prefer expensive new cars and small houses, etc.#Opportunities (or Constraints)The price of the commodity in questionPrices of related commoditiesConsumer incomeOther factors (e.g., quality, expectations, non-monetary costs)#Note that Tastes and Preferences are not observable.

Prices and Incomes, however, are observable.#So, while economists recognize that tastes and preferences are important determinants of the consumption choices people make, we focus much more on the impacts of Opportunities (or Constraints) on economic behavior.#DemandRelates the price of a commodity to the quantity purchased.Price represents the opportunity cost of consuming the commodity.orPrice represents how much of other commodities must be given up to consume the commodity of interest.#6MCEE Demand ELM, Rucker, June 19, 2013Class Demand for Doughnuts Take some doughnuts (One dozen? Two?) to class and ask your students:

How many doughnuts will you want if the doughnuts are free?

You might want to tell them that they have to plan to eat whatever they take before they leave the class.#7Make these prices come up sequentially, Insert a generic demand curve.MCEE Demand ELM, Rucker, June 19, 2013Class Demand for Doughnuts How many if the price is $.25? $.50? $1.00?$2.00?Graph the responses (Price on the vertical axis, Quantity on the horizontal axis)#Law of DemandThere is an inverse relationship between the price and the quantity demanded of a good.As the price increases the quantity demanded decreases.Or, as the price decreases the quantity demanded increases.This is the Law of Demand#9MCEE Demand ELM, Rucker, June 19, 2013Law of DemandIn other words, the demand curve is negatively sloped.Depending on the size of your class (and maybe the time of day), you should get . . . #Law of Demand

The Demand Curve for Doughnuts is Negatively Sloped#11MCEE Demand ELM, Rucker, June 19, 2013An Important DistinctionChanges in Quantity Demanded

vs.

Changes in Demand#12MCEE Demand ELM, Rucker, June 19, 2013Changes in the Price of a CommoditySay, Fuji ApplesIf the price of Fuji apples increases, then consumers will purchase fewer of them.If price decreases, consumers will purchase more Fuji apples.Other factors held constant.Factors that Affect Demand#13MCEE Demand ELM, Rucker, June 19, 2013Factors that Affect DemandChanges in the Price of a Commodity

Change in Quantity DemandedMovements along the demand curve for Fuji apples result from changes in the price of Fuji apples.Such movements are referred to as changes in quantity demanded.#14MCEE Demand ELM, Rucker, June 19, 2013The Demand for Fuji Apples Q (Pounds/week)

Price($/Q)An Increase in Quantity DemandedD0Q0P0P11Q12#D0The Demand for Fuji Apples Q (Pounds/week)

Price($/Q)A Decrease in Quantity DemandedQ0P0P11Q1216Factors that Affect DemandPrices of Related Goods

Complements: Goods that are consumed together.

If Fuji apples are more enjoyable with peanut butter then the two are complements.Cookies and milk.Coffee and cream.Movies and popcorn.Mountain Bikes and HelmetsAnd so forth. #17MCEE Demand ELM, Rucker, June 19, 2013Factors that Affect DemandPrices of Related Goods:

Complements (cont.)If the price of peanut butter increases,Less peanut butter will be demanded,and The demand for Fuji apples will decrease (it will shift to the left).This shift is referred to as a change in demand.#18MCEE Demand ELM, Rucker, June 19, 2013The Demand for Fuji ApplesP0D1Q1 Q (Pounds/week)Price($/Q)A Decrease in Demand from an Increase in the Price of a ComplementD0Q019Factors that Affect DemandPrices of Related Goods

Substitutes: Goods that replace each other. Fuji apples and Gala or Red Delicious or Pink Lady apples are substitutes.Also,Capn Crunch and Trix cereals.Cans and bottles of Diet Pepsi.Ribeye and sirloin steaks.Toyotas and Hondas.And so forth. #20MCEE Demand ELM, Rucker, June 19, 2013Factors that Affect DemandPrices of Related Goods:

Substitutes (cont.):If the price of Gala apples increases,Fewer Gala apples will be demanded,andThe demand for Fuji apples will increase as some people switch from Gala to Fuji Apples (it will shift to the right).

Again, this shift is referred to as a change in demand. #21MCEE Demand ELM, Rucker, June 19, 2013The Demand for Fuji Apples Q (Pounds/week)Price($/Q)An Increase in Demand from an Increase in the Price of a SubstituteD0Q0P0D1Q122Factors that Affect DemandIncome:

Income is held constant along a demand curve. What happens if income increases?

It depends on the good we are discussing.

Consider Tenderloin steaks . . .

If my income increases, at any given price of these steaks, I will now want to purchase more than I did before.#23MCEE Demand ELM, Rucker, June 19, 2013Factors that Affect DemandIncome:

Economists refer to goods like Tenderloin steaks as normal goods.

When incomes increase, the demand for these goods increases. If income decreases . . .

This shift is referred to as a change in demand. #24MCEE Demand ELM, Rucker, June 19, 2013The Demand for Tenderloin Steaks Q (Pounds/week)Price($/Q)An Increase in Demand Resulting from an Increase in IncomeD0Q0P0D1Q125Factors that Affect DemandIncome (cont.):

Alternatively, consider Top Ramen . . .

If my income increases, at any given price of Top Ramen, I will now want to purchase less than I did before.

Top Ramen is called an inferior good.

When incomes increase, the demand for these goods decreases. And vice versa.

Again, this shift is referred to as a change in demand. #26MCEE Demand ELM, Rucker, June 19, 2013The Demand for Top Ramen Q (Packages/wk)

Price($/Q)A Decrease in Demand Resulting from an Increase in IncomeD0Q0P0D1Q127SummaryKey Concepts:Determinants of Consumer ChoicesDemand curves Law of demandFactors that affect demand (price of the good of interest, incomes, prices of substitutes, prices of complements)2828MCEE Demand ELM, Rucker, June 19, 2013SummaryAn Important Distinction is:

Change in Quantity Demanded:A change in the price of a commodity causes a movement along the demand curve, or a change in quantity demanded.vs.Change in Demand:An event other than a change in the price of a commodity causes a shift in the demand curve, or a change in demand. Incomes, prices of substitutes, prices of complements, etc.2929MCEE Demand ELM, Rucker, June 19, 2013 QUESTIONS???

30Chart100.320.851.351.85

DemandQuantityPrice per unit

Sheet1QdP180.00150.32100.8551.3501.85

Sheet1

DemandQuantityPrice per unitThe Demand Curve is Downward Sloped

Sheet2

Sheet3