Transcript Understanding Consumer Demand Basics of Consumer Demand

Understanding
Consumer Demand
Basics of Consumer Demand
Scarcity
Price allocates scare resources
Two principles of consumer behavior


Consumers always select the item that gives
highest level satisfaction (utility maximization)
Additional satisfaction from consumption of
each additional unit declines (diminishing
marginal utility)
Factors Influencing Consumer
Demand
What does demand mean?
What does the law of demand mean?
Factors Influencing Consumer
Demand
Seven factors affecting the demand


Price of product
Price of competitor’s products
(substitute products)
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
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
Price of complement goods
Income
Population
Taste and preferences
Seasonality
Demand Shifters
Q2
Price
Price
$1
$2
$3
$4
$5
Quantity 1
50
40
30
20
10
Quantity 2
60
50
40
30
20
$5
Q1
$4
$3
Demand shifters
• Population
• Consumer taste and preference
• Income
• Price of substitutes
• Price of complements, etc
$2
$1
10
20
30
40
50
Quantity
Demand Elasticity
What is Elasticity?
Classifying sales response

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
Elastic
Inelastic
Unitary
Price Elasticity
Ep =
% change in quantity
% change in price
Price Elasticity
Example:
Price of caviar increases from $20 to $25 per pound
and quantity demand declines from 100 pounds to 50 pounds,
What is the price elasticity of caviar?
Ep =
% change in quantity of caviar
% change in price of caviar
-50%
=
= -2
+25%
What this tells a business manager?
Cross-Price Elasticity
Ecp =
% change in quantity
% change in price of a competitor’s
or complementary product
Cross-Price Elasticity
Example:
Price of cracker increase from $0.50 to $1.00 per
pound and caviar sales decrease from 100 pounds to 80 pounds,
What is cross- price elasticity of caviar to crackers?
Ecp =
% change in quantity of caviar
% change in price of crackers
-20%
=
= -0.2
+100%
What this tells a business manager?
Income Elasticity
Ey =
% change in quantity
% change in income
Income Elasticity
Example:
Consumers increase from $30,000 to $33,000 and
Caviar sales increased from 100 pounds to 120 pounds,
What is the income elasticity of caviar?
Ey =
% change in sales of caviar
% change in income
+20%
=
= +2
+10%
What this tell a business manager?
Relationship Between Price,
Total Revenue, and Elasticity
Ep
Elasticity
Effect on total revenue
<1
Inelastic
Price rise total revenue up
Price decline total revenue down
=1
Unitary
Price rise total revenue unchanged
Price decline total revenue unchanged
>1
Elastic
Price rise total revenue down
Price decline total revenue up
Why Demand for a Single Food is Elastic
Price
E
D
C
B
A
0
Sales (Quantity demanded)
A: all food items
B: all dairy product
C: all ice cream
D: all vanilla ice cream
E: Haagen-Dazs vanilla
ice cream