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Consumer Choice and Demand: Higher
Price, Less ConsumptionRandy Rucker
Professor
Department of Agricultural Economics and Economics
June 19, 2013
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How Much of a Commodity will
Consumers Purchase? Depends On: Tastes and preferences
Some 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.
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Opportunities (or Constraints)
The price of the commodity in question
Prices of related commodities Consumer income Other factors (e.g., quality,
expectations, non-monetary costs)
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Note that Tastes and Preferences are not observable.
Prices and Incomes, however, are observable.
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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.
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Demand Relates the price of a commodity to
the quantity purchased. Price represents the opportunity cost
of consuming the commodity.or Price represents how much of other
commodities must be given up to consume the commodity of interest.
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Class 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.
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Class Demand for Doughnuts
How many if the price is $.25? $.50? $1.00? $2.00?
Graph the responses (Price on the vertical axis, Quantity on the horizontal axis)
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Law of Demand There is an inverse relationship
between the price and the quantity demanded of a good.
As the price increases the quantity demanded decreases.
Or, as the price decreases the quantity demanded increases.
This is the Law of Demand
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Law of Demand
In other words, the demand curve is negatively sloped.
Depending on the size of your class (and maybe the time of day), you should get . . .
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Law of Demand
0.00
0.50
1.00
1.50
2.00
0 5 10 15 20
Pric
e pe
r uni
t
Quantity
Demand
The Demand Curve for Doughnuts is Negatively Sloped
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An Important Distinction
Changes in Quantity Demanded
vs.
Changes in Demand
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Changes in the Price of a Commodity Say, Fuji Apples If the price of Fuji apples increases, then
consumers will purchase fewer of them. If price decreases, consumers will
purchase more Fuji apples. Other factors held constant.
Factors that Affect Demand
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Factors that Affect Demand
Changes in the Price of a Commodity
Change in Quantity Demanded Movements along the demand curve for
Fuji apples result from changes in the price of Fuji apples.
Such movements are referred to as changes in quantity demanded.
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The Demand for Fuji Apples
Q (Pounds/week)
Price($/Q)
An Increase in Quantity Demanded
D0
Q0
P0
P1
1
Q1
2
D0
The Demand for Fuji Apples
Q (Pounds/week)
Price($/Q)
A Decrease in Quantity Demanded
Q0
P0
P11
Q1
2
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Factors that Affect DemandPrices of Related Goods
Complements: Goods that are consumed together. If Fuji apples are more enjoyable with
peanut butter then the two are complements.
Cookies and milk. Coffee and cream. Movies and popcorn. Mountain Bikes and Helmets And so forth.
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Factors that Affect DemandPrices of Related Goods:
Complements (cont.) If the price of peanut butter increases,
Less peanut butter will be demanded,and The demand for Fuji apples will decrease (it
will shift to the left). This shift is referred to as a change in
demand.
The Demand for Fuji Apples
P0
D1
Q1 Q (Pounds/week)
Price($/Q)
A Decrease in Demand from an Increase in the Price of a Complement
D0
Q0
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Factors 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, Cap’n Crunch and Trix cereals. Cans and bottles of Diet Pepsi. Ribeye and sirloin steaks. Toyotas and Hondas. And so forth.
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Factors that Affect DemandPrices of Related Goods:
Substitutes (cont.): If the price of Gala apples increases,
Fewer Gala apples will be demanded,and The 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.
The Demand for Fuji Apples
Q (Pounds/week)
Price($/Q)
An Increase in Demand from an Increase in the Price of a Substitute
D0
Q0
P0
D1
Q1
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Factors that Affect DemandIncome:
Income is held constant along a demand curve. What happens if income increases?
It depends on the good we are discussing. Consider Tenderloin steaks . . . If my income increases, at any given price
of these steaks, I will now want to purchase more than I did before.
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Factors that Affect DemandIncome:
Economists refer to goods like Tenderloin steaks as “normal goods.”
When incomes increase, the demand for these goods increases. If income decreases . . .
This shift is referred to as a change in demand.
The Demand for Tenderloin Steaks
Q (Pounds/week)
Price($/Q)
An Increase in Demand Resulting from an Increase in Income
D0
Q0
P0
D1
Q1
25
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Factors 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.
The Demand for Top Ramen
Q (Packages/wk)
Price($/Q)
A Decrease in Demand Resulting from an Increase in Income
D0
Q0
P0
D1
Q1
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Summary
Key Concepts: Determinants of Consumer Choices Demand curves Law of demand Factors that affect demand (price of the good
of interest, incomes, prices of substitutes, prices of complements)
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SummaryAn 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.
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QUESTIONS???
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