1. Consumer Demand

2. Patterns of Consumption
70% of household budgets is spent on housing, transportation and food.
“Essential” items have changed from years ago.

3. How the Consumer Dollar Is Spent
Housing
(shelter, furnishings, upkeep)
36.4
Transportation
21.3
Food
14.9
Clothing
4.9
Medical care
6.1
Other goods and services
11.0
Entertainment
5.4

4. Determinants of Demand
What determines what we buy?
The sociopsychiatric explanation
The economic explanation

5. The Sociopsychiatric Explanation
The desire for goods and services arises from our needs for social acceptance, security, and ego gratification.

6. The Sociopsychiatric Explanation
“Keeping up with the Joneses”
Self preservation
Expressions of affluence

7. Affluent Teenagers 10 20 30 40 50 60 70 80 90
100
Percent of Teens Owning Item
Television
84%
Stereo
81%
Computer
77%
Video game system
64%
CD burner
49%
Cell phone
47%
In-line skates
34%
Digital Camera
27%
Auto
37%
DVD player
61%
Pager/beeper 9%

8. The Economic Explanation
Demand – The ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus.

9. Determinants of Market Demand
Tastes — desire for this and other goods
If a study says ice cream is good for you, the demand for ice cream would increase.

10. Determinants of Market Demand
Income (of the consumer)
If you won the lottery you might buy more ice cream.
The demand for ice cream would increase, shifting the demand curve to the right.

11. Determinants of Market Demand
Expectations (for income, prices, tastes)
If you knew you were going to get rich soon you might deplete savings to buy more ice cream now.
Increases the demand for ice cream.

12. Determinants of Market Demand
Other goods (their availability and prices)
If the price of chocolate candy bars increased, you might buy ice cream instead of a candy bar.
Increases the demand for ice cream.

13. Determinants of Market Demand
The number of consumers in the market.
If the number of buyers in the ice cream market increased, the demand for ice cream would also increase.

14. Market Demand
The total quantities of a good or service people are willing and able to buy at alternative prices in a given time period.
Market demand is the sum of individual demands.

15. Utility Theory
Economists assume that the more pleasure a product gives, the higher price buyers are willing to pay.

16. Utility Theory
Students who like butter are willing to pay more for buttered popcorn than non-buttered popcorn because it offers more total utility.

17. Total vs. Marginal Utility
Utility is the pleasure or satisfaction obtained from good or service.
Total utility is the amount of satisfaction obtained from entire consumption of a product.

18. Total vs. Marginal Utility
Marginal utility is the change in total utility obtained by consuming one additional (marginal) unit of a good or service.

19. Total vs. Marginal Utility
Marginal utility is the change in total utility obtained by consuming one additional (marginal) unit of a good or service.

20. Law of Diminishing Marginal Utility
The marginal utility of a good declines as more of it is consumed in a given time period.

21. Law of Diminishing Marginal Utility
A student who enjoys popcorn can eat all he wants for free.
The first box consumed is rewarding.
The second box good.
A third box decent, etc.
After eating a sixth box, he gets sick.

22. Law of Diminishing Marginal Utility
Did the sixth box increase his satisfaction?
No, it had a negative marginal utility.

23. Law of Diminishing Marginal Utility
As long as the marginal utility is positive, the consumer receives additional satisfaction and total utility increases.

24. Law of Diminishing Marginal Utility
Additional quantities of a good yield increasingly smaller increments of satisfaction.

25. Total vs. Marginal Utility1 2 3 4 6 5
QUANTITY OF POPCORN
TOTAL UTILITY (utility per show)
Total utility 5
Marginal utility 1 2 3 4 6
QUANTITY OF POPCORN
MARGINAL UTILITY
(utility per box)
Decline in total utility
Diminishing marginal utility
Negative marginal utility
Rising total utility

26. Utility Theory
An absolute measure of utility is not possible because the perception of satisfaction differs among individuals.

27. Utility Theory Diminishing marginal utility is a common experience.
It is a sufficient basis for economic predictions of consumer behavior.

28. Utility Theory
Why do we waste water even though it is vital to human life?
We consume so much water that additional water offers little (if any) marginal utility.

29. Price and Quantity
Many forces determine how much we are willing to buy.

30. Price and Quantity
Economists focus on the relationship between price and quantity rather than trying to explain all the forces at once.
This is the ceteris paribus assumption.

31. Law of Demand
The concepts of marginal utility and ceteris paribus explain the downward slope of the demand curve.

32. Law of Demand
With given income, taste, expectations, and prices of other goods and services, people are willing to buy additional quantities of a good only if its price falls.

33. Law of Demand
The higher the marginal utility, the more you are willing to pay.

34. Law of Demand
Diminishing marginal utility explains why price must decrease in order for you to continue to buy a good or service.

35. Law of Demand
According to the law of demand, the quantity of a good demanded in a given time period increases as its price falls, ceteris paribus.

36. Demand Schedule

37. Demand Curve
The quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus.

38. Demand Curve
$0.55 A
0.50
As marginal utility declines, so does the willingness to pay B
0.45 C
0.40 D
0.35 E
0.30 F
PRICE (per ounce)
0.25 G
0.20 H
0.15 I
0.10 J
0.05 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32
QUANTITY DEMANDED (ounces per show)

39. Price Elasticity
The response of consumers to a change in price is measured by the price elasticity of demand.

40. Price Elasticity
The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.

41. Price Elasticity
The price of popcorn goes up 20% and the quantity demanded goes down 10%.
The elasticity is:
(E) =
percentage change in
quantity demanded
percentage change
in price
–10%
20%
– 0.5

42. Elastic vs. Inelastic Demand
Demand can be elastic, inelastic, or unitary elastic.

43. Elastic Demand
Demand is elastic if the absolute value of E is greater than 1.
Consumer response is large relative to change in price.

44. Inelastic Demand
Demand is inelastic if the absolute value of E is less than 1.
Consumers are not very responsive to price changes.

45. Unitary Elastic Demand
Demand is unitary elastic if the absolute value of E equals 1.
The percentage change in quantity demanded is equal to the percentage change in price.

46. Elasticity Estimates

47. Elasticity Estimates
Products that have elastic demands are airline travel, fresh fish and new cars.
Products that have inelastic demand are cigarettes, gasoline and coffee.

48. Price Elasticity and Total Revenue
Price elasticity explains why producers cannot charge the highest possible price.
Higher prices may actually lower total sales revenue.

49. Price Elasticity and Total Revenue
Total revenue — the price of a product multiplied by the quantity sold in a given time period.
Total revenue = price X quantity sold

50. Elasticity and Total Revenue

51. Elasticity and Total Revenue
$0.55
0.50
0.45
Price cuts increase total revenue if E>1.
0.40
0.35
Price cuts decrease total revenue if E<1.
0.30 F
PRICE (per ounce)
0.25
Total revenue = $3.00 G
0.20
Total revenue = $3.20 H
0.15
Total revenue = $3.00
0.10
0.05 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32
QUANTITY DEMANDED (ounces per show)

52. Elasticity and Total Revenue
Price cuts reduce total revenue if demand is price inelastic.
Price cuts increase total revenue if demand is price elastic.
Price cuts do not change total revenue if demand is unitary elastic.

53. Determinants of Elasticity
Differences in price elasticity are explained by several factors:
Necessities vs. luxuries
Availability of substitutes
Relative price

54. Necessities vs. Luxuries
Some goods are so critical to our everyday life that we regard them as necessities.
Demand for necessities is relatively inelastic.

55. Necessities vs. Luxuries
A luxury good is something we’d like to have but aren’t likely to buy unless our income jumps or the price declines sharply.

56. Availability of Substitutes
The greater the availability of substitutes, the higher the price elasticity of demand.

57. Relative Price
Elasticity increases as the price of the product increases relative to the consumer’s income.

58. Caveat Emptor: The Role of Advertising
Advertising campaigns are often designed to exploit our senses and lack of knowledge.

59. Are Wants Created?
Advertising is not the only reason consumption has increased.
Personality and social interaction dynamics have changed how much we consume.

60. Are Wants Created?
A successful advertising campaign is one that shifts the demand curve to the right.

61. The Impact of Advertising on a Demand Curve
Demand curve after advertising
PRICE (dollars per unit)
Demand curve before advertising
QUANTITY DEMANDED (units per time period)

62. Consumer Demand
End of Chapter 4