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Module-8 C onsumer choice and demand : Higher price, less consumption TEACHER’S GUIDE P. 231Defined P. 235Content standards P. 236Materials P. 236Procedure P. 240Closure P. 241Assessment P. 245Overheads P. 2602Answer key Visuals N Visuals for overhead projector. Copy to transparent paper for overhead. P. 246NVisual-1: Demand defined P. 247NVisual-2: Donut demand P. 248NVisual-3: CD demand P. 249NVisual-4: Movie schedule, income = $30 P. 250NVisual-5: Movie schedule, income = $60 P. 251NVisual-6: Change in quantity demanded P. 252NVisual-7: Change in demand Lessons 2 Copy and handout to students. P. 2542 Lesson-I: Demand and price P. 2562 Lesson-II: Demand shifters P. 2602 Lesson assessment Consumer choice and demand Higher price, less consumption Module-8 Teacher DEFINED H ouseholds buy many goods and services. We can think of the many goods and services they buy in a typical week or month being placed in a large basket. The total amount of the goods and services in the basket is limited by their income and the price of each good or service. How much of any one good or service do you consume? What affects your consumption decision? Consumption means the purchase of a good or service for use now or later. This is an important component of economics, and plays a critical role in decision making. The quantity of a good or service that consumers purchase depends on many variables. The law of demand states that when the price of a commodity rises and nothing else changes, the quantity consumed declines. The law of demand is true for a number of reasons. First, income is limited. Assume you have an income of $10 and the only good or service you can buy is an apple. If the price of an apple is $1, you can buy 10 apples. If the price of apples increases to $2, you can only buy 5 apples. Suppose now you can buy two commodities, apples or oranges. If your income is still $10 and both apples and oranges are $1 a piece, you can buy some combination of apples and oranges up to 10 pieces of fruit. You can exchange one apple for one orange. In other words, the opportunity cost of one apple is one orange. The opportunity cost of one orange is one apple. Assume you buy 5 apples and 5 oranges with your $10. Now, if the price of apples increases to $2 you can only buy 10 pieces of fruit if you buy all oranges. The higher price of apples forces you to substitute oranges for apples or buy less fruit. The opportunity cost has changed. You now must give up 2 oranges for one apple. The opportunity cost for an apple is 2 oranges. The opportunity cost for an orange is half an apple. If income does not change, when the price of one commodity rises, not enough money is available to maintain consumption of the same basket of goods previously consumed. (A basket of goods is made up of all goods and services consumed in some given time frame such as a week or month.) In addition, when the price of one good goes up, the opportunity cost to consume that good also rises. Maintaining the original consumption level of that good means that we have to give up some consumption of other goods. Remember from module two, price is a reflection of opportunity cost. Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 231 Consumer choice and demand Higher price, less consumption Module-8 Teacher The law of demand tells us there is an inverse or negative relationship between the price of a commodity and the quantity that will be consumed, if everything else remains the same. If price increases, less will be consumed. If price decreases, more will be consumed. When the price of an item changes, quantity demanded also changes. This is reflected in the demand curve. The figure shows the quantity of Macintosh apples that will be purchased at a given price. At a price of $4 per pound, one pound of Macintosh apples will be purchased. If the price increases to $6 per pound, fewer Macintosh apples, only half a pound, will be purchased, shown at point B. As shown at point C, at a lower price of $2 per pound, more Macintosh apples, one and one-half pounds, will be purchased. A change in price causes the quantity demanded to change. This is shown by a movement along the demand curve. The demand schedule follows. It shows the quantity demanded at each price. The demand Price ($ per #) Demand Curve for Macintosh Apples $12 $10 $8 $6 $4 $2 $0 B A C Demand 0 0.25 0.5 1 1.5 2 Quantity (# of Apples) Quantity (lbs of Apples) 0.00 0.25 0.50 1.00 1.50 2.00 232 Price ($ per pound) $10 $8 $6 $4 $2 $0 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices Consumer choice and demand Higher price, less consumption Module-8 Teacher schedule corresponds with the points on the demand curve. Other variables may also affect the demand for a commodity. Variables other than a change in price will affect the demand by shifting the curve. If the incomes of consumers change, the demand curve will also change. An increase in income will lead to an increase in the quantity consumed at each price. The number of consumers in a market, tastes and preferences, and expectations will each influence demand, as will changes in the prices of related goods. If the price of Macintosh apples increases, many other types of apples can be consumed instead. How much do you prefer a Macintosh over a Fuji or, Red Delicious, or Gala? When similar commodities are available, often called close substitutes, it is easy to shift consumption away from the higher priced item. Buying a Gala apple instead of a Macintosh, for example. A change in any of these factors will shift the demand curve as shown below. This is called a change or shift in demand (rather than a change Price ($ per #) Demand Curve for Macintosh Apples $12 $10 $8 $6 $4 $2 $0 D2 Demand 0 0.25 0.5 1 1.5 2 Quantity (# of Apples) in quantity demanded which is a movement along the demand curve due to a change in price). Demand curve D2 is an illustration of an increase in demand. An increase in demand shifts the demand curve to the right. If the number of consumers in the market increases (the number of consumers during Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 233 Consumer choice and demand Higher price, less consumption Module-8 Teacher the school year in a university town, for example), the demand curve will increase and shift it to the right. If health authorities announce that two Macintosh apples a day will prevent cancer, consumer preferences would likely adjust by increasing demand, shifting it to the right. If the price of other apple varieties increases, people will substitute Macintosh apples for other varieties and there will be an increase in the demand for Macintosh apples, again, shifting the demand curve to the right. In each of these cases consumers purchased a greater quantity at each price and the demand curve shifted to the right. At the original price of $4 per pound, consumers will now purchase one and one-half pounds of Macintosh apples instead of just one pound. Alternatively, when some of the students leave a university town in the summer, the number of consumers will decline, shifting demand to the left as shown below. Demand curve D3 shows a decrease in demand, a shift to the left. If a new crop of fresher, crisper apples is expected to arrive to market next week, the demand for apples this week may decline, shifting the demand curve to the left. Alternatively, a decrease in the price of other apple varieties will decrease the demand for Macintosh apples, shifting the curve to the left. (Be aware, a decrease in the price of Macintosh apples is a movement along the existing curve changing quantity demanded, not changing or shifting demand.) A change in the price of a related good will shift the demand for Macintosh apples. Price ($ per #) Demand Curve for Macintosh Apples $12 $10 $8 $6 $4 $2 $0 Demand D3 0 0.25 0.5 1 1.5 2 Quantity (# of Apples) 234 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices Consumer choice and demand Higher price, less consumption Module-8 Teacher CONCEPTS 1. Consumption 2. Demand 3. Law of demand 4. Change in quantity demanded 5. Change or shift in demand 6. Related commodities (substitutes and complements) OBJECTIVES 1. 2. 3. 4. Know that consumption is the purchase or use of a good or service. Understand the law of demand. Understand why the demand curve is downward sloping. Know the difference between a change in demand (a shift of the curve) and a change in quantity demanded (a movement along the curve). CONTENT STANDARDS National Content Standards in Economics 1. (Standard-1) Productive resources are limited. Therefore, people cannot have all the goods and services they want; as a result, they must choose some things and give up others. 2. (Standard-2) Effective decision making requires comparing the additional costs of alternatives with the additional benefits. 3. (Standard-7) Markets exist when buyers and sellers interact. 4. (Standard-8) Prices send signals and provide incentives to buyers and sellers. Montana Social Studies Content (Standard 5) 1. (Benchmark-1) Identify and explain basic economic concepts. 2. (Benchmark-2) Use basic economic concepts to explain current and historical events. TIME REQUIRED 2-3 class periods Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 235 Consumer choice and demand Higher price, less consumption Module-8 Teacher MATERIALS Donuts (or some other immediately consumable item that students like) Overhead projector Transparency pen Visuals for overhead projector: Copy to transparency. NVisual-1: Demand defined NVisual-2: Donut demand NVisual-3: CD demand NVisual-4: Movie schedule, income = $30 NVisual-5: Movie schedule, income = $60 NVisual-6: Change in quantity demanded NVisual-7: Change in demand Lesson worksheets: Copy for each student. 2 Lesson-I: Demand and price 2 Lesson-II: Demand shifters 2 Lesson assessment PROCEDURE 1. Economics is the study of choices and the allocation of scarce resources. An important component of economics is how much of a commodity (a good or service) to purchase. The quantity consumers purchase depends on a variety of variables. LQuestion: Ask students to identify some of these variables. Answer: Students should identify the price of the commodity, consumer income, and the price of related commodities. Write these on the board. The price of the purchased commodity will be the initial focus of discussion. Demand relates the price of a commodity and the quantity purchased at that price. Display NVisual-1: Demand defined. The law of demand states that there is an inverse relationship between the price of a commodity and the quantity purchased. Remind students that the price of a good or service represents the opportunity cost of that purchase; the amount of other commodities that must be given up to consume the desired good. A sacrifice is made for every consumption decision because income is limited. 2. Divvying-up donuts. a. Bring donuts (or some immediately consumable item the students 236 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices Consumer choice and demand Module-8 Teacher Higher price, less consumption like) to class. Tell the students you are going to sell the donuts. They must pay you cash for the donuts and they can consume them after receiving them. Display NVisual-2: Donut demand. LQuestion: Ask students how many donuts each of them would like if the donuts were free. Insert the quantity demanded at zero price on the demand schedule. Ask students how many donuts they will purchase if the price is $.25 per donut. Note that donuts must be paid for in cash before they may be consumed. Record the results. LQuestion: What if the price is $.50 per donut? Continue to raise the price as shown in the demand schedule until only a few donuts are willingly purchased by the students in the class. Record each price and quantity combination. b. Graph the resulting price and quantity combinations on the axes provided at the bottom of the visual. Remind students that the horizontal axis shows the quantity demanded and the vertical axis shows the price per unit. This is the class demand for donuts. c. Notice that the demand curve developed is negative or downward sloping. The law of demand states that there is an inverse relationship between the quantity demanded and the price of that commodity. This is shown on NVisual-1: Demand defined. If the price of donuts increases, less will be purchased and if price declines more will be purchased. 3. The negative slope of the demand curve is fundamental to economics and needs to be well understood. A second factor to understanding that a demand curve is negatively sloped is to recognize that all individuals face an income constraint (at least in the short run.) That income constraint may be because of income level, allowance, parental imposed spending limit, or net worth. LQuestion: Ask students if any of them were constrained in their ability to purchase a donut by their current income. 4. Handout 2 Lesson-I: Demand and price. Give the students time to read through the handout. Tell them not to work through the exercises yet. Work through the handout with students explicitly discussing how price and income affect a given demand curve. a. The price of the purchased commodity: The law of demand states that there is an inverse relationship between the quantity Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 237 Consumer choice and demand Module-8 Teacher Higher price, less consumption demanded and the price of that commodity. As demonstrated with the donut sales, if the price increases, less will be purchased and if price declines more will be purchased. Have students complete section 1 of the price of the purchased commodity, drawing a demand curve for CDs. The graph is displayed in NVisual-3: CD demand. b. Consumer Income: All individuals have a limited or fixed income, at least in the short run. This is called an income constraint. As a result, if the price of one commodity goes up, consumers must purchase less of at least some of the previously consumed goods and services. Have students work through section 2 of the movie example on the second page of the handout. c. Discuss the fact that the demand curve is downward sloping. In this example it is clear the demand curve is downward sloping because of the income constraint of $30. For any given income level, less movies can be purchased as the price increases. The completed demand schedule is displayed in NVisual-4: Movie schedule, income = $30. Have students help you trace the demand curve on the graph. d. Notice that the graphed demand curve includes only the movie’s price and quantity. A movement along the demand curve caused by a change in price is a change in the quantity demanded. All other factors are being held constant. A movement along a demand curve can only be caused by a change in that commodity’s price. All other variables, such as income, price of related commodities, tastes and preferences, and consumer expectations are held constant for a movement along a given demand curve. (Recall that this is similar for the supply curve.) 5. Handout 2 Lesson-II: Demand shifters. Give the students time to read through the handout. Tell them not to work through the exercises yet. Work through the handout with students explicitly discussing each major factor that may shift the demand curve. a. Changes in income, shift in demand: When income changes, the demand curve will also change or shift. An increase in income will increase the demand for a good and shift the demand curve right. A decrease in income will cause a decrease in the demand for a good and shift the demand curve left. Have students work 238 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices Consumer choice and demand Module-8 Teacher Higher price, less consumption through section 1 of 2 Lesson-II: Demand shifters. The lesson begins with the movie from the previous lesson but increases income to $60. b. Discuss with students that when income changes, the demand curve will also change. Demand will almost always increase when income increases. Consumers will purchase more goods at a given price when income rises. NVisual-5: Movie schedule, income = $60 shows the new demand curve. c. The price of related commodities, section 2 of the handout discusses the relationship of demand for the desired good and related goods. In the real world there are many goods and services available for consumers. Discuss the idea of related goods with students. i. Complements: If you are given a carton of milk and you especially enjoy donuts with milk, then you may be willing to pay more for a donut to eat with your milk. Donuts and milk would be considered complementary goods. A decrease in the price of milk (or a free carton) generally shifts your demand for donuts to the right so that you will buy more donuts at each given price. Other complementary goods may be skis and poles, coffee and cream, pancakes and syrup. ii. Substitutes: A substitute is a good that can easily replace another good. For example, if the price of a desired good rises, say the price of Coca Cola, then consumption may shift to a substitute good, perhaps Pepsi. This would cause the demand curve for Pepsi to shift to the right. iii. Recall the donuts sold in class to students. If there also exists a muffin shop in the school lobby, Molly’s Muffins, the amount of donuts students are willing to purchase in class may change, depending on the price of muffins. In this case, muffins are the commodity related to class donuts. Muffins are a substitute. Other substitutes may be Gala and Macintosh apples, skis and snow boards, and coffee and tea. d. Other variables that may affect the demand for a commodity include the number of consumers, taste and preferences, and expectations. If the number of students in the class (consumers) increased, it is likely that the number of donuts willingly purchased Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 239 Consumer choice and demand Higher price, less consumption Module-8 Teacher at reasonable prices will increase. If new information suggests that donut consumption contributes more to weight gain, then the preference for donuts may change and less be consumed at each price. Often economists also include a change in expectations as an influence on demand. If it is suddenly announced that donuts will be given away at lunch, then expectations have changed and thereby the demand for class donuts will likely change. Remember a change in any of these variables will shift the demand curve. All of these variables are held constant for a movement along a given demand curve. A movement along the demand curve is in response to a change in price. 6. Difference between a change in quantity demanded and shift in demand: The variable that results in a change in quantity demanded (a movement along the curve) is a change in the price of that commodity, whereas the variables that change the demand (a shift of the curve) are a change in the price of related commodities, income, number of consumers, tastes and preferences, and expectations. Display NVisual-6: Change versus quantity changed. Notice that the graphed demand curve includes price and quantity but none of the other variables. Therefore, a movement along the demand curve, as shown by a movement from point A to point B, is caused by a change in price and called a change in the quantity demanded. A price change in donuts does not change the demand curve for donuts but does cause a movement along the demand curve or a change in the quantity demanded. In contrast, the increase in income causes a shift in the demand curve as illustrated in NVisual-7: Change in demand. In fact a change in the price of related commodities, tastes and preferences, consumers, and expectations also can shift the demand curve. Remember, an increase in the demand is a shift to the right. A decrease in demand is a shift to the left. CLOSURE Lesson review 1. LQuestion: What information does the demand curve provide? 240 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices Consumer choice and demand Higher price, less consumption Module-8 Teacher Answer: The demand curve relays consumer information about the quantity they are willing to consume at different prices. 2. LQuestion: Why is the demand curve downward sloping? Answer: The law of demand states that when the price of a commodity rises, and nothing else changes, the quantity consumed declines, hence a downward sloping demand curve. This is true for a number of reasons. First, income is limited. Given income is fixed, when the price of one commodity rises, not enough money is available to maintain consumption of the same basket of goods. Also, substitutes are available. When the price of one item rises, it becomes relatively more expensive than other goods. 3. LQuestion: What is the difference between a change in quantity demanded and a shift in demand? Answer: A change in quantity demanded is a movement along the demand curve due to a change in price. A change in other factors (e.g., number of consumers, income, preferences, or a change in the price of related goods) will shift the demand curve. This is called a change or shift in demand. ASSESSMENT Multiple-choice questions 1. LQuestion: The demand curve shows: a. How consumers adjust the quantity of a product they are willing to buy in response to a change of income. b. A negative relationship between price and quantity. c. How much of a commodity consumers will buy given a limited income. d. Both b and c but not a. 2. LQuestion: An increase in demand (a shift to the right) may be the result of: a. A change in the price of the commodity desired. b. An increase in consumer income. c. A decrease in consumer income. Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 241 Consumer choice and demand Higher price, less consumption Module-8 Teacher d. A decrease in the number of consumers in the market. 3. LQuestion: A change in quantity demanded shows: a. A shift in the demand curve. b. The change in the number of consumers in a marketplace. c. A movement along the demand curve in response to a change in price. d. A price change in response to an increase in demand. 4. LQuestion: The law of demand states: a. When the price of a commodity rises and nothing else changes, the quantity consumed declines. b. When the price of a commodity rises and nothing else changes, the quantity consumed increases. c. When the quantity demanded of a good increases and nothing else changes, the price will fall. d. When consumers demand more of a good and nothing else changes, producers will provide more. 5. LQuestion: Which of the following will cause a rightward shift in the demand curve? a. An increase in the price of a complementary good. b. A decrease in the price of a substitute good. c. A decrease in the price of a complementary good. d. A fall in consumer income. Answers: 1. d 2. b 3. c 4. a 5. c Discussion/Essay Questions 1. LQuestion: At a price of $2.50 per gallon, Sally buys 1 gallon of milk a week. If the price of milk increases to $3.50 per gallon, and nothing else changes, will Sally buy more or less milk each week? Why? 242 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices Consumer choice and demand Higher price, less consumption Module-8 Teacher Answer: Sally will buy less milk each week. Given an income constraint, Sally must purchase less milk if she has not changed other consumption habits. 2. LQuestion: Why is the demand curve downward sloping? Answer: The law of demand states that when the price of a commodity rises, and nothing else changes, the quantity consumed declines, hence a downward sloping demand curve. This is true for a number of reasons. First, income is limited. Given income is fixed, when the price of one commodity rises, not enough money is available to maintain consumption of the same basket of goods. Also, substitutes are available. When the price of one item rises, it becomes relatively more expensive than other goods. 3. LQuestion: Give two examples of a change in demand. Answer: Remember, a change in demand is shown as a shift in the demand curve. Factors that change the demand curve include a change in the number of consumers, change in consumer income, change in preferences, or a change in the price of related goods. NOTES ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices ___________________________________________________ ___________________________________________________ 243 Consumer choice and demand Higher price, less consumption Module-8 Teacher NOTES ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ 244 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices Module-8 O ve r h e a d visuals Consumer choice and demand Consumer choice and demand Module-8 Visual Higher price, less consumption Visual-1: Demand Defined ... more will be consumed Law of demand tells us there is an inverse relationship between the price of a commodity and the quantity that will be consumed, if every thing else remains the same. ... less will be consumed N246 Consumer choice and demand Module-8 Visual Higher price, less consumption Visual-2: Donut Demand N247 Consumer choice and demand Module-8 Visual Higher price, less consumption Visual-3: cd Demand: the price of the purchased commodity N248 Consumer choice and demand Module-8 Visual Higher price, less consumption Visual-4: movie schedule, income = $30.00 N249 Consumer choice and demand Module-8 Visual Visual-5: movie schedule, income = $60.00 N250 Higher price, less consumption Consumer choice and demand Higher price, less consumption Module-8 Visual Visual-6: Change vs. Quantity Changed b a demand N251 Consumer choice and demand Higher price, less consumption Module-8 Visual Visual-7: Change vs. Quantity Changed A shift of the demand curve (increase to right, decrease to left) in response to a change in the price of related commodities, tastes and preferences, consumers income, and expectations. D2 D3 N252 demand Module-8 L e sso n wor ksh e e ts consumer choice and demand Consumer choice and demand Higher price, less consumption Module-8 Lesson Lesson–I: Demand and Price Consumer choice and demand: Higher price, less consumption Price per CD $1.00 $5.00 $10.00 $15.00 Demand for CDs $20 Price per CD Quantity of CDs Consumed per month 15 10 5 1 $15 $10 $5 $0 0 5 10 15 Quantity of CDs An important issue in economics is how much of a commodity (or service) will be purchased. The quantity consumers purchase depends on a variety of variables. Some of the most important factors are: The price of the commodity, consumer income, and the price of related commodities. The price of the purchased commodity demand relates the quantity purchased of a particular commodity to the price of that commodity. The price of that commodity represents the opportunity cost, the amount 254 2 of other commodities that must be given up to consume the desired good. The demand schedule above for CDs shows the relationship between price and quantity. Plot the points of the demand schedule on the graph above right. The law of demand states that there is an inverse relationship between the quantity demanded and the price of that commodity. That is if the price increases, less will be purchased and if price declines more will be purchased. The above demand schedule shows that as the price per CD increases, the number of CDs consumed per month declines. Your graph should show the downward slope of the demand curve. Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 20 Consumer choice and demand Higher price, less consumption Module-8 Lesson Lesson–I: Demand and Price Consumer choice and demand: Higher price, less consumption Demand for Movies $30 Price per Movie Movie Demand Schedule Quantity Price per of Movies Movie Income = $30 $1.00 $2.00 $3.00 $5.00 $6.00 $10.00 $15.00 $30.00 $25 $20 $15 $10 $5 $0 0 10 20 30 40 50 60 Quantity of Movies Recall, economics is the study of the allocation of scarce or limited resources. Another reason the demand curve has a negative slope is because all individuals have a limited budget (at least in the short run). This constraint may be because of your earnings, allowance, parental imposed spending limit, or net worth. Consider the following example. Movies are the only commodity that exists or can be purchased. You have an income of $30 per month, you spend all of it on movies. Determine the quantity of movies (Q) that may be purchased at the various prices (P) with your given income of $30. You can only attend as many movies as your income will allow. To calculate the quantity of movies you can see at various prices, divide your income by the price of a movie: Q = 30/P. The various movie prices are shown in figure-7 Fill in the first column for the quantity of movies you can see at the given prices. Plot the points of the demand schedule on the diagram to its right. Why is the demand curve downward sloping? Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 2255 Consumer choice and demand Higher price, less consumption Module-8 Lesson Lesson–II: Demand Shifters Demand Shifters A n important component of economics is how much of a commodity (or service) to purchase. The quantity consumers purchase depends on a variety of variables. Some of the most important factors are: The price of the commodity, consumer income, and the price of related commodities. The previous lesson discussed how the price of the commodity causes a change the quantity demanded and a movement along the demand curve. This lesson will focus on factors that actually change or shift demand. Change in income, shift in demand As shown in Lesson–I, an income constraint influences how much will be purchased. A change in income will also impact consumer decisions. If a person’s income increases, they will spend more money and purchase more commodities. In the single commodity movie case, if the income is increased to $60 then your demand for movies would increase and the demand curve would shift to the right. Calculate the quantity demanded on the demand schedule below given an income of $60. Plot these points and draw the new demand curve on your diagram using arrows to show the direction of the shift. Movie Demand Schedule Quantity of Price per Movies Movie Income = $60 256 2 $30 Price per Movie $1.00 $2.00 $3.00 $5.00 $6.00 $10.00 $15.00 $30.00 Demand for Movies $25 $20 $15 $10 $5 D1 (Income = $30) $0 0 10 20 30 40 Quantity of Movies Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 50 60 Consumer choice and demand Higher price, less consumption Module-8 Lesson Lesson–II: Demand Shifters Change in Demand vs. Change in Quantity Demanded Change in quantity demanded. Notice that the graphed demand curve includes price and quantity but none of the other variables. Therefore, a movement along the demand curve caused by a change in price is called a change in the quantity demanded. A price change in donuts does not change (or shift) the demand curve for donuts but does cause a movement along the demand curve or a change in the quantity demanded. A movement along a demand curve can only be caused by a change in that commodity’s price. All other variables, such as income, price of related commodity’s, tastes and preferences, and consumer expectations are held constant for a movement along a given demand curve. Change in Demand. In contrast, the increase in income causes a shift in the demand curve as illustrated earlier. In fact a change in the price of related commodities, tastes and preferences, consumers, and expectations also can shift the demand curve. The price of related commodities In a more complex economy, with multiple commodities available for purchase, another variable becomes important: Related commodities. Complements. If you are given a carton of milk and you especially enjoy donuts with milk, then you may be willing to pay more for a donut to eat with your milk. Donuts and milk would be considered complementary goods. A decrease in the price of milk (or a free carton) would increase your demand for donuts at any given price. The demand curve for donuts would shift to the right. Substitutes. If Molly’s Muffins opens in the school lobby, the amount of donuts you are willing to purchase in class may change. Molly’s Muffins provides a good substitute for the donuts. If the price of muffins declines, then you are likely to purchase fewer donuts in class and more muffins instead. Your demand for class donuts will have declined, shifting the demand curve to the left. Other variables. Variables that may affect the demand for a commodity include the number of consumers, taste and preferences, and expectations. If the number of students in the class Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 2257 Consumer choice and demand Higher price, less consumption Module-8 Lesson Lesson–II: Demand Shifters (consumers) increased, the number of donuts willingly purchased at reasonable prices will also likely increase. If new information suggests that donut consumption contributes more to weight gain, then the preference for donuts may change and less be consumed at each price. Often economists also include a change in expectations as an influence on demand. If it is suddenly announced that donuts will be given away at lunch, then expectations will change and the demand for donuts will also change. Each of these factors will shift the demand curve. Review A Change in quantity demanded is in response to a change in the price of the desired good. This is shown as a movement along the demand curve. A shift in demand results from a change in the price of related commodities, income, number of consumers, tastes and preferences, or expectations. An increase in demand is a shift to the right. A decrease in demand is a shift to the left. Practice Determine whether the following factors will change the quantity demanded or shift the demand curve and draw in the appropriate change moving from point A. Dem and forSubw ay Sandw iches 6 Price per Sandwich 1. Jake’s allowance has increased from $20 to $30 per month. This will: Change the quantity of subway sandwiches demanded. Shift Jake’s demand for subway sandwiches. 4 .A 2 0 0 0 1 2 3 4 Quantity of Sandw iches 258 2 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 5 Consumer choice and demand Higher price, less consumption Module-8 Lesson Lesson–II: Demand Shifters Price per Twinkie 2. The price of Twinkies has risen. This will: Change the quantity of Twinkies demanded. Shift the demand for Twinkies. Dem and forTw inkies 6 4 .A 2 0 0 0 1 2 3 4 5 Quantity of Tw inkies 3. The price of CDs doubles. This will: Change the quantity of CDs demanded. Shift the demand for CDs. Price per CD player Dem and forCD players 5 4 3 2 1 0 0 .A 0 1 2 3 4 5 Quantity of CD players 4. It is expected that the price of iPods will decline at the end of the month. The affect on the demand for iPods today will be: A change in the quantity of iPods demanded. A shift in the demand for iPods. Price per iPod Dem and for iPods 5 4 3 2 1 0 0 .A 0 1 2 3 4 5 Quantity of iPods 5. The price of whipping cream has increased. This will: Change the quantity of waffles demanded. Shift the demand for waffles. Price per Waffle Dem and for Waffles 5 4 3 2 1 0 0 .A 0 1 2 3 4 5 Quantity of Waffles Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 2259 Consumer choice and demand Higher price, less consumption Module-8 Answer Lesson Assessment Multiple-choice questions 1. LQuestion: The demand curve shows: a. How consumers adjust the quantity of a product they are willing to buy in response to a change of income. b. A negative relationship between price and quantity. c. How much of a commodity consumers will buy given a limited income. d. Both b and c but not a. 2. LQuestion: An increase in demand (a shift to the right) may be the result of: a. A change in the price of the commodity desired. b. An increase in consumer income. c. A decrease in consumer income. d. A decrease in the number of consumers in the market. 3. LQuestion: A change in quantity demanded shows: a. A shift in the demand curve. b. The change in the number of consumers in a marketplace. c. A movement along the demand curve in response to a change in price. d. A price change in response to an increase in demand. 4. LQuestion: The law of demand states: a. When the price of a commodity rises and nothing else changes, the quantity consumed declines. b. When the price of a commodity rises and nothing else changes, the quantity consumed increases. c. When the quantity demanded of a good increases and nothing else changes, the price will fall. d. When consumers demand more of a good and nothing else changes, producers will provide more. 5. LQuestion: Which of the following will cause a rightward shift in the demand curve? a. An increase in the price of a complementary good. b. A decrease in the price of a substitute good. c. A decrease in the price of a complementary good. d. A fall in consumer income. 260 2 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices Consumer choice and demand Higher price, less consumption Module-8 Answer Lesson assessment Discussion/essay questions 1. LQuestion: At a price of $2.50 per gallon, Sally buys 1 gallon of milk a week. If the price of milk increases to $3.50 per gallon, and nothing else changes, will Sally buy more or less milk each week? Why? 2. LQuestion: Why is the demand curve downward sloping? 3. LQuestion: Give two examples of a change in demand. Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 2261 Consumer choice and demand Higher price, less consumption Module-8 Teacher NOTES ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 262