94171 ch04 ptg01 hr 098-131 - air academy high school · lesson 4.2 elasticity of demand in...

98 UNIT 2 THE MARKET ECONOMY

UNIT 2The Market Economy

4 Demand

5 Supply

7 Market Forces

8 Market Structure

Voluntary National ContentStandards in EconomicsThe following CEE Standards are addressed in Unit 2:

Standard 1 Scarcity

Standard 2 Decision Making

Standard 4 Incentives

Standard 5 Trade

Standard 6 Specialization

Standard 7 Markets and Price

Standard 8 Role of Prices

Standard 9 Competition and Market Structure

Standard 10 Institutions

Standard 13 Income

Standard 14 Entrepreneurship

Standard 16 Role of Government and Market Failure

Standard 17 Government Failure

UNIT 2 OVERVIEW

Unit 2 introduces students to the concepts of demand and supply. They then apply these concepts to study the eff ects of market forces on demand and supply curves. Next, they explore the various market structures. Finally, they explore gov-ernment regulation of the private sector through antitrust regulation.

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PACING GUIDE FOR UNIT 2 One-Semester Days of Study

Two-Semesters Days of Study

Block Schedule 90-Minute Blocks

Chapter 4: DemandThe Demand Curve 2 3 2Elasticity of Demand 1 3 1Changes in Demand 2 3 2Chapter 5: SupplyThe Supply Curve 2 3 2Shifts of the Supply Curve 1 3 1Production and Cost 1 3 1

99Unit 2 O v e r v i e w

Buck Institute Project Based Economics (PBE)Project based economics (PBE) activities from the Buck Institute may be used to enrich your stu-dents’ learning experience. The PBE units can be found at www.bie.org using the “Project Search” tool.

PBE Activities for Unit 2 “High School Food Court”Lessons 4.1, 4.2, 4.3, 5.1, 6.1, 6.2: Students explore how the forces underlying demand and costs ( supply) result in the production of specifi c goods and services which may not satisfy the desire of all groups.Concepts taught: supply and d emand, demand schedule, com-peting needs, cost of production, economic profi t, equilibrium price, equilibrium quantity, opportunity costs, profi t, scarcity, total costs, total revenue, trade-off

“Invisible Hand”Lessons 6.1, 6.2, 6.3: Present dilemma of setting the price of gasoline when the market-based price leaves many without the abil-ity to purchase fuel.Concepts taught: black market, choice, demand, economic incentive, equilibrium price and quantity, free enterprise, laissez-faire, markets, price, market economy, opportunity cost

“Monopoly’s Might”Lessons 7.1 and 7.2: Students run a school-based enterprise (SBE) to explore pricing, production, and profi ts.Concepts taught: barriers to entry, changes in demand, competition, new enterprise, equilibrium point, equilibrium quantity, externality, guide function of profi ts

“Might Strikes Back”Lessons 7.2, 7.2, 7.3: Students are employees of a large monopolistic corporation. Dealing with anti-trust issues, students work with government entities to reach a compromise.Concepts taught: U.S. Department of Justice Antitrust Division, antitrust laws, barriers to entry, collective bargaining, competition, equilibrium price and quantity, FTC, FDA, labor unions

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Chapter 5Supply

Chapter 6Market Forces

Chapter 7Market

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UNIT 2

The Market Economy

I n 1962, Sam Walton opened his fi rst store in Rogers, Arkansas, with a sign that read: “Wal-Mart Discount

City. We sell for less.” Walmart now sells more than any other retailer in the world because its prices are the lowest around. As a consumer, you understand why people buy more at a lower price. Walmart, for example, sells on average more than 20,000 pairs of shoes an hour. Buyers love a bargain, but sellers must make sure their prices cover the costs of supplying the goods. Diff erences between the desires of buyers and sellers are sorted out by competitive pressures in a market economy.

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PACING GUIDE FOR UNIT 2 continued One-Semester Days of Study

Two-Semesters Days of Study

Block Schedule 90-Minute Blocks

Chapter 6: Market ForcesPrice, Quantity, and Market Equilibrium 1 3 1Shifts of Demand and Supply Curves 1 2 1Market Efficiency and the Gains from Exchange 1 3 1Behavioral Economics 1 1 1Chapter 7: Market StructurePerfect Competition and Monopoly 2 3 2Monopolistic Competition and Oligopoly 1 3 1Antitrust, Regulation, and Competition 2 3 2


CHAPTER OVERVIEW

LESSON 4.1 The Demand Curve This lesson explains the law of demand and introduces the concepts of demand schedule and demand curve.

LESSON 4.2 Elasticity of Demand In addition to intro-ducing the concept, this lesson explains the relevance of elasticity of demand. Factors that infl uence elas-ticity of demand are also discussed.

LESSON 4.3 Changes in Demand This lesson identifi es the determinants of demand and explains how a change in each will aff ect the demand curve. The distinction between money price and time price is addressed.

C O N S I D E RAsk students to consider the ques-tions posed on this page as they study Chapter 4. After studying all three lessons, students should be able to answer the questions. The content related to each question can be found on the pages indi-cated below.• Why are newspapers sold in

vending machines that allow you to take more than one copy? See page 104—Diminishing Marginal Utility.

• How much chocolate do you eat when you can eat all you want? See page 104—Diminishing Marginal Utility.

• What cures spring fever? See page 104—Diminishing Marginal Utility.

• What economic principle is behind the saying, “Been there, done that”? See page 104— Diminishing Marginal Utility.

• Why do higher cigarette taxes cut smoking by teenagers more than by other age groups? See page 116–117—An Application: Teenage Smoking.

Teaching Resources• Instructor’s Resource CD• Activities and Projects Masters• Spanish Resources• ExamView® CD• Workbook Instructor’s Edition• Chapter Test Instructor’s Edition• CEE Standards and Correlations• Personal Finance Activities• The Teaching Economist

Student Resources• www.cengage.com/school/contecon

– Ask the Expert– Crossword Puzzle– Economics e-collection– Flashcards– Graphing Workshop

• Workbook


CONSIDER ...

5 Why are newspapers sold in vending machines that allow you to take more than one copy?

5 How much chocolate do you eat when you can eat all you want?

5 What cures spring fever?

5 What economic principle is behind the saying, “Been there, done that”?

5 Why do higher cigarette taxes cut smoking by teenagers more than by other age groups?

CHAPTER 4

Demand4.1 The Demand Curve

4.2 Elasticity of Demand

4.3 Changes in Demand

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Chapter 4 D e m a n d 101

Chapter 4 D e m a n d

demand A relation showing the quantities of a good that consumers are willing and able to buy per period at various prices, other things constant

law of demand The quantity of a good demanded per period relates inversely to its price, other things constant

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4.1 T H E D E M A N D C U R V E

Learning Objectives

L 1 Explain the law of demand.

L 2 Interpret a demand schedule and a demand curve.

In Your WorldTh e primary building blocks of a market economy are demand and supply. Consumers demand goods and services that maximize their utility, and producers supply goods and services that maximize their profi t. As a consumer in the U.S. market economy, you demand all kinds of goods and services. You buy less of a good when its price increases and more when the price decreases. Th is section draws on your own experience as a consumer to help you understand demand, particularly the demand curve.

Key Termsdemand 101

law of demand 101

marginal utility 103

law of diminishing marginal utility 103

demand curve 105

quantity demanded 106

individual demand 107

market demand 107

LAW OF DEMANDHow many 12-inch pizzas do people buy each week if the price is $12? What if the price is $9? What if it’s $6? Th e answers reveal the relationship between the price of pizza and the amount purchased. Such a relationship is called the demand for pizza.

Demand indicates how much of a product consumers are both willing and able to buy at each price during a given time period, other things constant. Because demand pertains to a specifi c period—a day, a week, a month—you should think of demand as the amounts purchased per time period at each price. Also, notice the emphasis on willing and able. You may be able to buy a rock con-cert ticket for $50 because you can aff ord one. However, you may not be willing to buy one if the performers don’t interest you enough.

Th is relation between price and quantity demanded refl ects an economic law. Th e law of demand says that quantity demanded varies inversely or negatively, with price, other things constant. Th us, the higher the price, the smaller the quantity demanded. Th e lower the price, the greater the quantity demanded.

Demand, Wants, and NeedsConsumer demand and consumer wants are not the same thing. Wants are

unlimited. You may want a new Mercedes-Benz SL600 Roadster convertible,

L 1Explain

the law of

demand.

F O C U S

4.1 THE DEMAND CURVE

To introduce this lesson, bring an item of food to class that students are likely to desire, such as a chocolate chip cookie or a bag of chips. By show-of-hands, ask students whether they would be willing to buy the item for $5. Make a chart of their responses on the board. Then make the same off er at progressively lower prices keep-ing track in a table the number of items that would be sold at each price. Students will realize that, at lower prices, the number of items purchased will be greater.

ObjectivesTo help focus their attention remind students to read the lesson objec-tives before reading the lesson.

Key Ter msDirect students to write each key term on a separate index card. Then write the matching defi nition and page reference on the back of the corresponding card. Encourage students to use the cards to study for quizzes and tests.

In Your WorldBefore covering the defi nition of demand, ask the students to name the various goods or services they have demanded so far today. Write these items on the board indicat-ing those goods or services which multiple students have demanded. Refer back to the list after covering the defi nition of demand. Place a check by those goods and services that are not needs. Next, cover the defi nition of wants. Students should then realize that most, if not all, the items checked are wants.

Buck Institute Project Based EconomicsThe PBE “High School Food Court” activity ties in with the concepts of demand, the law of demand, the law of diminishing marginal utility, the demand curve, quantity demanded, individual demand, and market demand in Lesson 4.1.

Council on Economic Education VoluntaryNational Content Standards in EconomicsA complete list of the CEE Standards appears on pages xx–xxi of this book. The following standards are addressed in Lesson 4.1.

Standard 1 Scarcity

Standard 2 Decision Making


Standard 7 Markets and Prices



UNIT 2 THE MARKET ECONOMY102

but the $139,100 price tag is likely beyond your budget. (Th e quantity you demand at that price is zero.) Nor is demand the same as need. You may have outgrown your winter coat and need a new one. But if the price is $200, you may decide your old coat will do for now. If the price drops enough—say, to $100—then you become both willing and able to buy a new one.

Substitution EffectWhat explains the law of demand? Why,

for example, does the quantity demanded increase when the price falls? Th e explanation begins with unlimited wants meeting scarce resources. Many goods and services help satisfy your particular wants. For example, you can satisfy your hunger with pizza, tacos, burgers, chicken, sandwiches, salads, or hun-dreds of other foods. Similarly, you can satisfy your desire for warmth in the winter with warmer clothing, a home-heating system, a trip to Hawaii, or in other ways.

Some ways of satisfying your wants are more appealing to you than others. A trip to Hawaii is more fun than warmer clothing. In a world without scarcity, everything would be free, so you would always choose the most at-

tractive alternative. Scarcity, however, is a reality, and the degree of scarcity of one good relative to another helps determine each good’s relative price.

Notice that the defi nition of demand includes the other-things-constant assumption. Among the “other things” assumed to remain constant are the prices of other goods. For example, if the price of pizza declines while other prices remain constant, pizza becomes relatively cheaper. Consumers are more willing to buy pizza when its relative price falls. People tend to substitute pizza for other goods. Th is is called the substitution eff ect of a price change. On the other hand, an increase in the price of pizza, other things constant, increases its relative price. Pizza’s opportunity cost increases—that is, the amount of other goods you must give up to buy pizza increases. Th is higher opportunity cost causes some consum-ers to substitute other goods for the now higher-priced pizza, thus reducing their quantity of pizza demanded.

Remember that the change in the relative price—the price of one good relative to the prices of other goods—causes the substitution eff ect. If all prices changed by the same percent, there would be no change in relative prices and no substitution eff ect.

The law of demand applies even to personal choices, such as whether or not to own a pet. For example, after New York City passed an anti-dog-litter law, owners had to follow their dogs around the city with scoopers and plastic bags. The law raised the cost, or price, of owning a dog. What do you think happened to the quantity of dogs demanded as a result of this law, and why?

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T E A C HLaw of DemandHold up a cell phone and ask stu-dents why most young people want to own and use a cell phone of their own. Then tell them to imagine they own a cell phone but are required to pay a set per-minute price for the time they spend talking. Ask them to make a table that shows how many minutes they believe they would talk on their phone each month if they were required to pay 20 cents per minute. Progressively lower the per-minute charge until it is only half-a-cent per minute. Point out that they have created a demand schedule for their demand for cell phone use, and that as the price declined they were willing to purchase (demand) more minutes. This example demonstrates the law of demand.

Think Critically Through VisualsDirect students to focus their attention on the photograph on this page. Ask for a volunteer to answer the question posed in the caption.

AnswerPossible answer: The quantity of dogs demanded would decrease because the price/cost of owning a dog has increased.

Outside ResourcesDirect Mail Use direct mail sales fl iers to demonstrate the law of demand. Retailers often reduce prices to try to increase the quantities of products they are able to sell, possibly eliminating inventories of outdated products. Fliers also can be used as a jumping-off place to discuss diminishing marginal utility. Ask students why prices for products are most often high when they are fi rst introduced to the market and lower as more people come to own them over time.


T E A C HLaw of Demand (continued)Present the income and substitution eff ects as the direct consequence of the “other things constant” assump-tion. Holding other prices constant while changing the price of the good whose demand curve is being constructed results in a change in its opportunity cost because its relative price has changed. Holding money income constant while changing the price of the good results in a change in the purchasing power or real income of the person whose demand curve is being constructed. Use examples to discuss how the demand for a particular good changes when the price of a substitute changes. Students may have trouble with this concept, but if concrete examples are used, it becomes clear. For example if Pepsi is on sale, those who normally purchase Coca-Cola may switch to Pepsi, causing the demand for Coca-Cola to decline (substitutes).

E N R I C HTell students they are in charge of setting the price for tickets to a concert given by a musical group that is cur-rently popular among young people. Although they want to collect as much money from sales as possible, they also want to fi ll an 8,000-seat auditorium because the performance is going to be fi lmed. It is important that there are no empty seats for publicity reasons. Ask them to explain how they would set the price for tickets and how this demonstrates the law of demand.


Income EffectA fall in the price increases the quantity demanded for a second reason. If you

take home $36 a week from a Saturday job, your money income is $36 per week. Your money income is simply the number of dollars you receive per period, in this case, $36 per week. Suppose you spend all your income on pizza, buying four a week at $9 each. What if the price falls to $6? At that lower price you can now aff ord six pizzas a week.

Your money income remains at $36 per week, but the drop in the price increases your real income—that is, your income measured in terms of how much it can buy. Th e price reduction, other things constant, increases the purchasing power of your income, thereby increasing your ability to buy pizza and, indirectly, other goods. Th e quantity of pizza you demand likely increases because of this income eff ect of a price change. You may not increase your quantity demanded to six pizzas, but you can now aff ord six. If you purchase fi ve pizzas a week when the price drops to $6, you would still have $6 left to buy other goods.

Th us, the income eff ect of a lower price increases your real income and thereby increases your ability to purchase pizza and other goods, making you better off . Th e income eff ect of a lower price is underscored in Walmart’s slogan, which emphasizes the benefi ts of low prices: “Save money. Live better.” Because of the income eff ect, consumers typically increase their quantity demanded after a price decrease. Conversely, an increase in the price of pizza, other things constant, reduces your real income, thereby reducing your ability to buy pizza. Because of the income eff ect of a price increase, consumers typically reduce their quantity demanded after a price increase.

Diminishing Marginal UtilityAfter a long day of school, studies, and sports, you are starved, so you visit a

local pizzeria. Th at fi rst slice tastes great and puts a serious dent in your hunger. Th e second is not quite as good as the fi rst. A third is just fair. You don’t even consider a fourth slice. Th e satisfaction you derive from an additional unit of a product is called your marginal utility. For example, the additional satisfaction you get from a second slice of pizza is your marginal utility of that slice.

Th e marginal utility you derive from each additional slice of pizza declines as your consumption increases. Your experience with pizza refl ects the law of diminishing marginal utility. Th is law states that the more of a good an individual consumes per period, other things constant, the smaller the marginal utility of each additional unit consumed.

Diminishing marginal utility is a feature of all consumption. A second foot-long submarine sandwich at one meal would probably yield little or no marginal utility. You might still enjoy a second movie on Friday night, but a third one is probably too much to take. In fact, almost anything repeated enough can become torture, such as being forced to watch the same movie or listen to the same song over and over. Yes, variety is the spice of life.

marginal utility Thechange in total utility resultingfrom a one-unit change in consumption of a good

law of diminishing marginal utility The moreof a good an individual consumesper period, other things constant, the smaller the marginal utility of each additional unit consumed

103



Consumers buy things to increase their satisfaction, or utility. In deciding what to buy, people make rough estimates about the marginal utility, or marginal benefi t, they expect from the good or service. Based on this expected marginal benefi t, people then decide how much they are willing and able to pay. Because of diminishing marginal utility, you would not be willing to pay as much for a second slice of pizza as for the fi rst. Th is is why it takes a decrease in price for you to increase your quantity demanded.

Suppose each slice of pizza sells for $2. How many slices do you buy? You increase consumption as long as the marginal benefi t you expect from another slice exceeds $2. You won’t buy an additional slice if you expect its marginal benefi t is less than $2. Simply put, you aren’t willing to pay $2 for something that’s worth less than that to you.

What if the price of pizza drops to $1 a slice? You buy more as long as the marginal benefi t of another slice exceeds $1. Th e law of diminishing marginal utility helps explain why people buy more when the price declines.

Diminishing marginal utility has wide applications. Restaurants depend on the law of diminishing marginal utility when they off er all-you-can-eat specials. People at all-you-can-eat specials continue to eat as long as the margin-al benefi t of another bite is greater than zero. And no doggie bags—the deal is all you can eat now, not all you can eat now and for as long as the doggie bag holds out.

After a long winter, that fi rst warm day of spring is something special and is the cause of “spring fever.” Th e fever is cured by many warm days like the fi rst. By the time August rolls around, most people get much less marginal utility from yet another warm day.

For some goods, the drop in marginal utility after the fi rst unit is dramatic. For example, a second copy of the same daily newspaper would likely provide you with no marginal utility. In fact, the design of newspaper vending machines relies on the fact that you won’t take more than one.

More generally, the expressions “Been there, done that” and “Same old, same old” convey the idea that, for many activities, things start to get old after the fi rst time. Your marginal utility, or marginal benefi t, declines.

Explain the law of demand in your own words.

How does the law of diminishing marginal utility apply to pizza consumption?

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T E A C HLaw of Demand (continued)Consider using an example from the school cafeteria menu to illustrate the law of demand.

Think Critically Through VisualsDirect students to focus their att-ention on the photograph on this page. Ask for a volunteer to answer the question posed in the caption.

AnswerThe law of diminishing marginal utility, as applied to pizza consump-tion, states that each additional piece of pizza you consume off ers less and less satisfaction.

AnswerThe law of demand says that quan-tity demanded varies inversely with price, other things constant.

GROUP ACTIVITYTell the members of each group that they are assigned to set the price for candy bars sold by a local drugstore and that the price must maximize the store’s total revenue from candy sales. To do this, they must determine how many candy bars members of their group would purchase each week at diff erent prices you provide, such as $1, $.80, $.60, and so on. By multiplying these quantities by the prices, they can calculate the store’s potential revenue. What would happen to the store’s sales and revenue if a neighboring bakery had a sale on cupcakes and cookies? How does this activity demonstrate the substitution eff ect?


Learning Through GraphicsUse Figure 4.1—Demand Schedule and Demand Curve for Pizza to illustrate the law of demand.

T E A C HDemand Schedule and Demand CurveShare the following demand sched-ule with students.

Demand for Servings of French Fries at Mel’s Diner

Price Quantity Demanded per Day

$1.25 50

1.00 75

0.75 150

0.50 350

Discuss how it demonstrates the law of demand and can be used to construct a demand curve for sales of french fries at Mel’s Diner. Ask students to discuss what might hap-pen to sales of other food items at Mel’s Diner if he charged only $0.50 for french fries. (Answer: People might demand fewer of the alterna-tive food items as they substituted french fries for them.)

Extend the ContentThe distinction between demand and quantity demanded is diffi cult for some students to grasp. Such confusion can be reduced by continually reminding students that demand is a curve that depicts the relationship between price and quantity demanded assuming that all other factors (which may aff ect demand) are held constant. Quantity demanded is a point on the curve that shows the quantity demanded at a given price.


DEMAND SCHEDULE AND DEMAND CURVEDemand can be expressed as a demand schedule and as a demand curve. Panel (A) of Figure 4.1 shows a hypothetical demand schedule for pizza. When you describe demand, you must spec-ify the units being measured and the period considered. In this example, the price is for a 12-inch regular pizza and the period is a week. Th e schedule in panel (A) lists prices, along with the quantity demanded at each price.

At a price of $15, for example, consumers in this market demand 8 million pizzas per week. As you can see, the lower the price the greater the quantity de-manded, other things constant. If the price drops as low as $3, consumers demand 32 million per week. As the price falls, consumers substitute pizza for other goods. As the price falls, the real income of consumers increases, causing them to increase the quantity of pizza they demand. As pizza consumption increases, the marginal utility of pizza declines, so quantity demanded increases only if the price falls.

Th e demand schedule in panel (A) of Figure 4.1 appears as a demand curve in panel (B), with price measured on the vertical axis and the quantity demanded per week on the horizontal axis. Each combination of price and quantity listed in the demand schedule becomes an individual point on the market demand curve. Point a, for example, indicates that if the price is $15, consumers demand 8 million pizzas per week. Th ese points connect to form the market demand curve for pizza, labeled D. Note that some demand curves are straight lines, some are crooked lines, and some are curved lines, but all of them are called demand curves, and they all slope downward.

L 2Interpret

a demand

schedule

and a demand

curve.

demand curve A curve or line showing the quantities of a particular good demanded atvarious prices during a given time period, other things constant

FIGURE 4.1 Demand Schedule and Demand Curve for PizzaMarket demand curve D shows the quantity of pizza demanded, at various prices, by all consumers.

(A) DEMAND SCHEDULE

Price Quantity per demanded per

pizza week (millions)

a $15 8b 12 14c 9 20d 6 26e 3 32

(B) DEMAND CURVE

$15

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6

9

12

Millions of pizzas per week

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Direct students to the Graphing Workshop for Unit 2A or consider using the presentation as a teaching tool in class. Watch and listen to an explanation about a demand sched-ule and a demand curve.www.cengage.com/school/contecon


Think Critically Through VisualsDirect students to look carefully at the photo on the page. Ask one student to answer the question, “What is the result of the interac-tion between buyers and sellers?” ( Market prices are determined and goods and services are allocated.) Follow up by asking if there is anything in the photo that would aff ect the number of items that are purchased. (Answer: The 40% off sign) Finally ask how the picture might diff er if the prices weren’t reduced. (Answer: The young man in the red shirt might be holding fewer items refl ecting a reduced quantity demanded. Also, there might be fewer customers in the photo.)

AnswerPrices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, aff ecting incentives.

ESSENTIAL QUESTION CEE Standard 7: Markets and PricesUse this feature to reinforce under-standing of this standard.

AnswerThe interaction between buyers and sellers in a market determines market prices thereby allocating scarce goods and services.

UNIT 2 THE MARKET ECONOMY

A demand curve slopes downward from left to right, refl ecting the law of demand—that is, price and quantity demanded are inversely, or negatively, related, other things constant. Several things are assumed to remain constant along the demand curve, including the prices of other goods. Th us, along the demand curve, the price of pizza changes relative to the prices of other goods. Th e demand curve shows the eff ect of a change in the relative price of pizza—that is, relative to other prices, which do not change.

Demand Versus Quantity DemandedBe careful to distinguish between demand and quantity demanded. An

individual point on the demand curve shows the quantity demanded at a particular price. For example, point b on the demand curve in Figure 4.1 indi-cates that 14 million pizzas are demanded when the price is $12. Th e demand for pizza is not a specifi c quantity, but the entire relation between price and quantity demanded. Th is relation is represented by the demand schedule or the demand curve. To recap, quantity demanded refers to a specifi c amount of the good on the demand schedule or the demand curve, whereas demand refers to the entire demand schedule or demand curve.

quantity demanded The amount demanded at a particular price

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ESSENTIAL QUESTION

What is the result of the interaction between buyers and sellers?

Standard CEE 7: Markets and PricesA market exists when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services.

106

Curriculum Connection—HistoryDuring the 1930s, the United States and most other nations experienced the Great Depression. During these years, unemployment rates reached 25 percent in the United States, and many people who were still employed worked for low wages. Ask students to describe what must have happened to demand for goods and services during these years.



Individual Demand and Market DemandIt is also useful to distinguish between individual demand, which is the

demand of an individual consumer, such as you, and market demand, which sums the individual demands of all consumers in the market. Th e market demand curve shows the total quantities demanded per period by all consumers at various prices.

In most markets, there are many consumers, sometimes millions. To give you some feel for how individual demand curves sum to the market demand curve, assume that there are only three consumers in the market for pizza: Hector, Brianna, and Chris. Figure 4.2 shows how three individual demand curves are summed across to get the market demand curve. When the price of a pizza is $8, for example, Hector demands two pizzas a week, Brianna demands one, and Chris demands none. Th e quantity demanded at a price of $8 is therefore three pizzas. At a price of $4, Hector demands three per week, Brianna two, and Chris one, for a quantity demanded of six. Panel (D) sums horizontally each individual’s demand curve to arrive at the market demand curve.

Th e market demand curve is simply the sum of the individual demand curves for all consumers in the market. Unless otherwise noted, this book focuses on market demand.

individual demand The demand of an individual consumer

market demand The sumof the individual demands of allconsumers in the market

What do a demand schedule and a demand curve show?

FIGURE 4.2 Market Demand for PizzaThe individual demand curves of Hector, Brianna, and Chris are summed across to get the market demand curve. At a price of $8 per pizza, Hector demands 2 per week, Bri-anna demands 1, and Chris demands none. Quantity demanded at a price of $8 is 2 + 1 + 0 = 3 pizzas per week. At a lower price of $4, Hector demands 3, Brianna demands 2, and Chris demands 1. Quantity demanded at a price of $4 is 6 pizzas. The market demand curve D is the horizontal sum of individual demand curves d

H, d

B, and d

C.

Pizzas per week Pizzas per week Pizzas per week Pizzas per week

(A) HECTOR

0 1 2 3

4

8

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(B) BRIANNA

0 1 2

4

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$12

(C) CHRIS

0 1

4

8

$12

0

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(D) MARKET DEMAND FOR PIZZA

1 3 6

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Learning Through GraphicsDirect students to focus their attention on Figure 4.2—Market Demand for Pizza. Point out that the market demand curve is the horizontal sum of the individual demand curves.

AnswerThe demand schedule and demand curve show the quantity of a good demanded at a certain price.

A P P LYAssign Lesson 4.1 from the Contem-porary Economics Workbook.

A S S E S SAssign all or part of Lesson 4.1 Assessment on page 109 as home-work or an in-class activity.

Study ToolsDirect students to the online study tools for Lesson 4.1.www.cengage.com/school/contecon

C L O S ERevisit the In Your World feature on the fi rst page of the lesson.Review the objectives for Lesson 4.1.

R E T E A C HAsk students to construct a demand schedule for the number of times they would visit a beach, amusement park, or other popular location during an entire summer. Instruct them to include diff erent logical prices. Amusement park tickets might be priced at $18, $15, $12, and so on. Ask them to discuss how their schedules demonstrate diminishing marginal utility. What would happen to their demand schedules if they accepted a summer job that paid $100 per week? (They would have more money to spend but less time to spend it.)


Before assigning the feature, hold up a mail-order catalog. Tell students that 150 years ago, mail-order catalogs from companies such as Sears and Montgomery Ward gave people living in remote areas access to more items and some-times lower prices than they could fi nd locally. Tell them that today, with the advent of e-commerce, we also are going through a marketing change brought about by technol-ogy; this change can be compared to those brought about by the introduction of catalog sales.

Apply the SkillStudents will fi nd a wide variety of merchants, prices, and services online. Most will make a choice based on either price or conve-nience. Students should realize that the Internet allows them access to retailers around the world that they would otherwise not have practical access to, therefore increasing their options of goods and services.


At one time, people who lived in rural areas had little choice about where they shopped or the amount they paid for many products they pur-chased. For example, a woman living in Fargo, North Dakota, in 1870 had very few shopping alternatives. She probably bought cloth for her family’s clothing at a local store where she paid the price the shop-keeper asked. If the same fabric cost half as much 400 miles away in Chicago, she would have had no way of knowing this. Even if she did, she could not have traveled the 400 miles to take advantage of the lower price. This situation no longer exists. Modern technology and transportation provide rural resi-dents with almost as many shopping alternatives as urban dwellers.

Consider how the following facts have aff ected the quantity of consumer goods and services people demand in the United States today.

• The prices charged for most goods and services are similar regardless of where they are off ered for sale.

• Online shopping now accounts for roughly 20 percent of the value of consumer goods and services Americans purchase.

• Many online retailers off er free shipping for consumer products.

The ability to easily compare prices over the Inter-net ensures consumers that they are being asked to pay a fair price for the goods and services they want and need.

Finding Lower PricesAlso thanks to the Internet, consumers who wish to buy deeply discounted goods or services have an alternative. They may purchase many products through websites such as eBay, Priceline, or Over-stock.com. These online services off er consumers a way to buy goods or services from businesses that are willing to accept lower prices than consum-ers might normally expect to pay. Hotels.com, for example, off ers advantages to both consumers and hotel owners by helping people rent hotel rooms at a discounted price that would otherwise remain empty. This collaboration between the online service and the retailer allows each party to the transaction to benefi t: The consumer is able to pay less for the hotel room; the hotel owners receive at least some income for their unsold rooms; and Hotels.com earns a fee for providing its service. Transactions such as these would have been diffi cult, if not impossible, before the Internet was created.

Apply the SkillImagine you have decided to purchase a formal dress or tuxedo to wear to a friend’s wedding. Investigate prices for this product off ered by local retailers, online merchants, and discount services on the Internet. Iden-tify two retailers of each type, list the prices they ask for similar products, and explain why you would choose a particular retailer. Explain how the Internet has in-creased the options of goods and services demanded in the United States.

COMMUNICATION AND COLLABORATION

Technological Progress and Quantity Demanded


(p. 109) Answers will vary. Student work should demonstrate an understanding of why diminishing marginal utility causes people to be less willing to buy additional units of a particular product unless the product’s price falls.


4.1 ASSESSMENT

Think Critically1. Students may point out that

most of the students who want to own a sports car are not able to aff ord one. Without the ability (income) to purchase, there is no demand.

2. Most students will assume homeless people are unable to purchase warmer clothing because they do not have the resources to do so. Therefore, their need would not be consid-ered a demand.

3. Students may point out that at the lower price more people could aff ord to purchase tickets than at the higher price. In eff ect, their real income increased.

4. Students may say that the second taco is worth less to Joe than the fi rst because he will not pay $1.50 to buy it. This shows that the utility he receives from tacos diminishes as he receives more of them within a particular period of time.

5. Students may say that per-day market demand for school lunches is made up of all meals that would be purchased by students and teachers at every possible price.

Graphing Exercise6. Students may point out that

the demand curve shows that people are only willing to purchase more pairs of shoes at lower prices, which means that they must receive less utility from extra pairs as they buy more. See the visual at the bot-tom of this page.

Make Academic Connections7. She must set a price of $60 per

pair, or lower. Answers to the rest of the question will vary. Students may point out she will probably have diffi culty reaching her goal because many custom-ers will substitute shoes from the competing store because of its lower price.

8. Students may point out that the fi rst television sets were quite expensive. Although many people wanted to own one, they often were not able to aff ord to buy one.


4.1 ASSESSMENT

Think Critically 1. Many students would like to own an expensive sports car. Is this considered demand? Why or

why not?

2. Homeless people need warmer clothes for the winter. Is this considered demand? Why or why not?

3. How would the income effect of a price change be demonstrated by a $10 reduction in the price of tickets to a concert that resulted in a sell-out crowd?

4. Joe is willing to pay $1.50 for one taco after basketball practice but chooses not to purchase a second taco for the same price. How does this illustrate the law of diminishing marginal utility?

5. What is the average price of a lunch in the cafeteria at your school? What, approximately, is the market quantity demanded at that price?

Graphing Exercise 6. The owners of a local shoe store surveyed their customers to determine how many pairs of

running shoes they would buy each month at different prices. The results of the survey appear in the demand schedule below. Use these data to draw a demand curve for running shoes. Explain how your graph demonstrates the law of diminishing marginal utility.

Working in small teams, brainstorm a list of products that most members of the team consume in a typical week. Then, working on your own, apply the law of diminishing marginal utility to each item. How many units of each item would you consume per week before the marginal benefi t is less than the price of each unit? Compare your answers with those of other teams members.

TeamWork

DEMAND FOR RUNNING SHOES

Price Quantity Demanded

$70 40

$60 50

$50 60

$40 70

$30 80

109

Make Academic Connections 7. Marketing Nancy is the sales manager of the shoe store described above. The owner has

told her that she must set a price that allows the store to sell at least 50 pairs of running shoes next month. What price should she set? If another local store has a big sale and lowers its price for running shoes by 25 percent, will Nancy’s employer reach the sales goal? Why or why not?

8. History When television sets fi rst became available to consumers in the late 1940s, many people wanted one. Still, very few sets were sold at fi rst. Explain why people’s desire to own televisions did not result in a great demand for this product.

Visualizing the Answer—Graphing Exercise6. The answer includes a graph. Students’ graphs

should look similar to the one shown here. An Excel spreadsheet containing this graph, along with supporting data, is available on the Instructor’s Resource CD.

DEMAND FOR RUNNINGSHOES

0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00

$100.00

0 20 40 60 80 100Quantity

Pric

e

Quantity Demanded


F O C U S

ELASTICITY OF DEMAND

To introduce elasticity, hold up a piece of elastic and a piece of rope of equal lengths. Explain that the rope repre-sents the amount of a cancer-curing drug that will be sold and the elastic represents the amount of a brand of laundry soap that will be sold. Have two students pull on the ends of the rope and point out that the length does not change. Have two other students pull on the ends of the elastic and point out that the length changes. The rope is inelastic and so is the amount of the drug sold. Quantity demanded does not change if the price is lower—people will buy the amount they need regardless of price. The fact that the length changes shows that the other band is elastic. This band represents the demand for the laundry soap. People demand more at lower prices than they do at higher prices.

ObjectivesTo help focus their attention, remind students to read the lesson objec-tives before reading the lesson.

Key Ter msDirect students to use each of the key terms in a separate sentence or short paragraph that helps demon-strate the meaning of the term.

In Your WorldAsk students the following ques-tions about the sensitivity to price changes of the goods and services they buy at school. Would the price of a school play, concert, or football game make a diff erence in how many students attend these func-tions? What about the cost of school lunches? Might fees associated with certain classes aff ect students’ de-sire to enroll in them? Does the cost of a parking pass aff ect the number of students who drive? What about “pay-to -play” fees for student activi-ties? Tell students that they might reconsider their opinions after read-ing this section.

4.2


Key Termselasticity of demand 110

total revenue 112

COMPUTING ELASTICITY OF DEMAND Figure 4.3 shows the market demand curve for pizza developed earlier. As you can see, if the price of a pizza falls from $12 to $9, quantity demanded increases from 14 million to 20 million. Is such a response in quantity demanded a little or a lot? Demand elasticity measures consumer responsiveness to the price change. Elasticity is another word for responsiveness. Specifi cally, elasticity of demand measures the percent change in quantity demanded divided by the percent change in price, or

Elasticity of demand = Percent change in quantity demanded

Percent change in price

What’s the demand elasticity when the price of pizza falls from $12 to $9? Th e percent increase in quantity demanded is the change in quantity, 6 million, divided by 14 million. So, quantity demanded increases by 43 percent. Th e percent change in price is the price change of $3 divided by $12, which is 25 percent. Elasticity of demand is the percent increase in quantity demanded, 43 percent, divided by the percent decrease in price, 25 percent, which equals 1.7.

4.2 E L A S T I C I T Y O F D E M A N D

Learning Objectives

L 1 Compute the elasticity of demand, and explain its relevance.

L 2 Discuss the factors that infl uence elasticity of demand.

In Your WorldKnowing the law of demand is useful, but a demand curve can off er you even more information. It can show you how sensitive quantity demanded is to a change in price. For example, suppose you manage a fast-food restaurant and would like to know what happens to total revenue if you introduce a dollar menu. Th e law of demand indicates that a lower price increases the quantity demanded, but by how much? Your success or failure as a manager depends on how much you know about the demand for your product. Th is section measures how sensitive quantity demanded is to a change in price.

L 1Compute

the elasticity

of demand,

and explain

its relevance.

elasticity of demand Measures how responsivequantity demanded is to a price change; the percent change in quantity demanded divided by the percent change in price

110



Standard 7 Markets and Prices



Outside ResourcesMackinac Center The Mackinac Center for Public Policy is an organization that supports economics education. It provides current estimates of the elasticity of demand for various products at its website located at www. educationreport.org/1247. Ask students to investigate this site and fi nd products that have either elastic or inelastic demand. Ask them to explain reasons for the types of demand for the products they choose.


Elasticity ValuesDoes an elasticity of 1.7 indicate that consumers are sensitive to the price

change? To off er some perspective, economists sort elasticity into three general categories. If the percent change in quantity demanded exceeds the percent change in price, the resulting elasticity exceeds 1.0. Such a demand is said to be elastic, meaning that quantity demanded is relatively responsive to a change in price. Th e demand for pizza is elastic when the price falls from $12 to $9.

If the percent change in quantity demanded just equals the percent change in price, the resulting elasticity is 1.0, and this demand is called unit elastic. Finally, if the percent change in quantity demanded is less than the percent change in price, the resulting elasticity lies between 0 and 1.0, and this demand is said to be inelastic, or relatively unresponsive to a change in price.

In summary, demand is elastic if greater than 1.0, unit elastic if equal to 1.0, and inelastic if between 0 and 1.0. Also, the elasticity usually varies at diff erent points on a demand curve. Demand is almost always more elastic at higher prices and less elastic at lower prices. Th is is particularly true when the demand curve is a straight line that slopes down from left to right.

Elasticity expresses a relationship between two amounts: the percent change in price and the resulting percent change in quantity demanded. Because the focus is on the percent change, you don’t need to be concerned with how output or price is measured. For example, suppose the good in question is apples. It makes no dif-ference in the elasticity formula whether you measure apples in pounds, bushels, or even tons. All that matters is the percent change in quantity demanded. Nor does it matter whether you measure price in U.S. dollars, Mexican pesos, Swiss francs, or Zambian kwacha. All that matters is the percent change in price.

FIGURE 4.3 The Demand for Pizza

If the price falls from $12 to $9, the quantity of pizza demanded in-creases from 14 million to 20 million per week.

D

8 14 20 26 32 0

3

6

9

12

$15


Pric

e pe

r piz

za

T E A C HComputing Elasticity of DemandContinue with the example about Mel’s Diner. Tell students that Mel decided to lower the price of his fries from $1.00 per serving to $.75 (a 25 percent change in price). As a result, the quantity of fries demanded increased from 75 to 150 servings per day (a 100 percent change in the quan-tity demanded). In this example, a 25 percent change in price resulted in a 100 percent change in the quantity demanded. The elastic-ity of demand for Mel’s fries in this example is 4 (100 ÷ 25 = 4). A value of 4 indicates demand that is quite elastic. Products that are easily sub-stituted, such as fries, almost always have demand that is elastic. An alternative example is demand for insulin that is used to control diabetes. If the price of a month’s supply of this medica-tion decreased from $20 to $15 (a 25 percent decrease), the amount purchased might increase by only 1.0 percent because people who need this drug are already buying it at a price of $20. The new lower price would not cause them to buy more or cause other people who do not need the drug to purchase it. In this case the elasticity of demand would be 0.04 (0.01 ÷ 0.25 = 0.04). A value of 0.04 indicates demand that is very inelastic. Products that are necessary and cannot be substi-tuted, such as insulin, almost always have demand that is inelastic.

Learning Through GraphicsUse Figure 4.3—The Demand for Pizza to illustrate elasticity of demand.

Direct students to the Graphing Work-shop for Unit 2A, or consider using the presentation as a teaching tool in class. Watch and listen to an explana-tion of the elasticity of demand.www.cengage.com/school/contecon



Elasticity and Total RevenueKnowledge of elasticity is especially valuable to producers, because elasticity

also indicates how a price change aff ects total revenue. Total revenue is price multiplied by the quantity demanded at that price. What happens to total revenue when price decreases? A lower price means producers are paid less for each unit sold, which tends to decrease total revenue. However, according to the law of demand, a lower price increases quantity demanded, which tends to increase total revenue.

Th e impact of a lower price on total revenue can be estimated using elasticity of demand. When elasticity is greater than 1.0, or elastic, reducing the price by 5 percent causes quantity demanded to increase by more than 5 percent. Th us the total revenue increases. When elasticity is 1.0, or unit elastic, reducing the price by 5 percent causes quantity demanded to increase by 5 percent. In this case total revenue remains unchanged. When elasticity is less than 1.0, or inelastic, reducing the price by 5 percent causes the quantity demanded to increase, but by less than 5 percent. So, total revenue falls.

Knowing a product’s elasticity can help businesses with their pricing decisions. If demand is inelastic, producers will never willingly cut the price because doing so would reduce their total revenue. Th e percent increase in quantity demanded would be less than the percent decrease in price. Why cut the price if selling more reduces total revenue?

What does the elasticity of demand measure?

DETERMINANTS OF DEMAND ELASTICITYSo far you have explored the link between elasticity of demand and what happens to the total revenue of producers when the price changes. However, you have not yet considered why elastic-ity diff ers for diff erent goods. Several characteristics infl uence the elasticity of demand.

Availability of SubstitutesYour individual wants can be satisfi ed in a variety of ways. A rise in the price

of pizza makes other food relatively cheaper. If close substitutes are available, an increase in the price of pizza prompts some people to buy those substitutes. But if nothing else satisfi es like pizza, the quantity of pizza demanded does not decline as much. Th e greater the availability of substitutes for a good and the more similar these are to the good in question, the greater that good’s elasticity of demand.

total revenue Price multiplied by the quantitydemanded at that price

L 2Discuss

factors that

infl uence

elasticity of

demand.

112

T E A C HComputing the Elasticity of Demand (continued)Return to the example of Mel’s decision to lower the price of his french fries. Remind students that at a price of $1.00, Mel sold 75 serv-ings per day. His total revenue from these sales was $75 ($1.00 × 75 = $75). After he lowered the price of the fries to $.75, his sales grew to 150 servings per day. At the lower price his total revenue increased to $112.50 ($.75 × 150 = $112.50). When the price of a product with elastic demand is lowered, its total revenue will grow. In the case of the lowered price for insulin, tell students to imagine that a drugstore sold 1,000 vials per month at $20 each. The store’s total revenue at that price was $20,000 ($20 × 1,000 = $20,000). When the price was lowered to $15, the quan-tity sold increased by 1 percent to 1,010. The store’s total revenue fell to $15,150 ($15 × 1,010 = $15,150). When the price of a product with inelastic demand is lowered, its total revenue will fall.

AnswerThe elasticity of demand measures the percent change in quantity demanded divided by the percent change in price.

R E T E A C HProvide students with the following information. Ask them to identify the type of demand each product has as elastic, inelastic, or unit elastic. Discuss how they know which type of demand exists for each product.A. When the price of hamburgers went from $2.00 to $2.20, sales declined from 200 to 150 per day. (Demand is

elastic. A 10 percent increase in price resulted in a 25 percent decline in sales.)B. When the price of hats fell from $10 to $8, total revenue went from $100 to $88 per day. (Demand is inelastic.

A decline in price resulted in a decline in total revenue.)C. When the price of a haircut was raised from $8 to $10, the number of haircuts sold each day fell from 20 to 16.

(Demand is unit elastic. A 20 percent increase in price resulted in a 20 percent decrease in sales.)

Buck Institute Project Based EconomicsThe PBE “High School Food Court” activity ties in with the concept of total revenue in Lesson 4.2.


T E A C HDeterminants of Demand ElasticityTo help students understand the determinants of demand elasticity, ask them to identify a popular musi-cal group they would be willing to pay to see. Tell them to assume this group is going to give only one local concert before it disbands and never performs again. There are only 300 unsold tickets available for this concert. Ask them to discuss the elasticity of demand for these tickets. They should agree that the demand would be inelastic. Then ask them to change their assumptions. This time the group has contracted to perform at eight diff erent locations within 50 miles of your school (this makes more than 25,000 tickets available), and they have made public statements that they intend to perform at least this often every year for the foresee-able future. What would this do to the elasticity of demand for tickets to their concerts? Students should agree that the demand for the tickets will be much more elastic. Use these examples to lead to a discussion of factors that make demand either elastic or inelastic. When many items of a particular type are available, the demand for these items is much more likely to be elastic.


Th e number and similarity of substitutes depend on the defi nition of the good. Th e more broadly a good is defi ned, the fewer substitutes there are and the less elastic the demand. For example, everyone needs some sort of shoes, so the demand for shoes in general tends to be inelas-tic. If shoe prices go up 20 percent, most people will still buy shoes eventually. If you consider one particular brand of shoes, however, the demand will be more elastic because there are many other brands of shoes you could buy instead. For example, if only one shoe manufac-turer raises its price by 20 percent, many shoe buyers will switch to other brands, which have not increased in price.

Certain goods—many prescription drugs, for instance—have no close substitutes. Th e demand for such goods tends to be less elastic than for goods with close substitutes, such as Bayer Aspirin. Much advertising is aimed at establishing in the consumer’s mind the uniqueness of a particular product—an eff ort to convince consumers “to accept no substitutes.”

Share of Consumer’s Budget Spent on the GoodRecall that a higher price reduces quantity demanded in part

because a higher price lowers the real spending power of consumer income. A demand curve refl ects both the consumer’s willingness and ability to purchase a good at alternative prices. Because spending on some goods represents a large share of the consumer’s budget, a change in the price of such a good has a substantial impact on the amount consumers are able to purchase.

An increase in the price of housing, for example, reduces the ability to pur-chase housing. Th e income eff ect of a higher price reduces the quantity demand-ed. In contrast, the income eff ect of an increase in the price of, say, paper towels is less signifi cant because paper towels represent such a tiny share of any budget. Th e more important the item is as a share of the consumer’s budget, other things constant, the greater is the income eff ect of a change in price, so the more elastic is the demand for the item. Th is explains why the quantity of housing demanded is more responsive to a given percent change in price than is the quantity of paper towels demanded.

Duration of the Adjustment PeriodConsumers can substitute lower-priced goods for higher-priced goods, but

fi nding substitutes takes time. For example, between 1973 and 1974, the OPEC oil cartel raised the price of oil sharply. Th e initial result was a 45-percent increase in the price of gasoline, but the quantity demanded decreased only 8 percent. As more time passed, however, people purchased smaller cars and made greater use of public transportation. Because the price of oil used to generate electricity and

Do you think demand for sunglasses is elastic or inelastic? Identify the determinant of demand elasticity that supports your answer.

Phot

odis

c/G

etty

Imag

es

E N R I C HTell students that they operate a movie theater. On average, 500 people used to purchase $8 tickets at their theater every Saturday evening. Last month, they raised their price to $9 only to see the average number of tick-ets sold fall to 450. Ask students to calculate the elasticity of demand for these tickets and to state whether the demand is elastic or inelastic. What happened to the total revenue as a result of the price increase? (0.10 divided by 0.125 = 0.8; the demand is inelastic; total revenue increased from $4,000 to $4,050)


AnswerSome students may suggest that the demand for particular brands of sunglasses is elastic. When the price of one brand increases, consumers will substitute a diff erent brand. The demand might be inelastic only if all brands of sunglasses increased in price.



to heat homes increased as well, people bought more energy-effi cient appliances and insulated their homes better. As a result, the decline in the amount of oil demanded was greater over time as consumers adjusted to the price hike.

Th e longer the adjustment period, the easier it is to fi nd lower-priced substi-tutes. Th us, the longer the period of adjustment, the more responsive the change in quantity demanded is to a given change in price.

Figure 4.4 shows how the demand for gasoline becomes more elastic over time. Given an initial price of $3.00 a gallon, let Dw be the demand curve one week after a price change; Dm, one month after; and Dy, one year after. Suppose the price increases to $3.50. Th e more time consumers have to adjust to the price increase, the greater the reduction in quantity demanded. Th e demand curve Dw shows that one week after the price increase, the quantity demanded has not declined much—in this case, from 100 million to 95 million gallons per day. Th e demand curve Dm indicates a reduction to 75 million gallons per day after one month, and demand curve Dy shows a reduction to 50 million gallons per day after one year.

FIGURE 4.4 Demand Becomes More Elastic Over TimeD

w is the demand curve one week after a price increase from $3.00 to $3.50 per gallon.

Along this curve, quantity demanded falls from 100 million to 95 million gallons per day. One month after the price increase, quantity demanded has fallen to 75 million gallons per day along D

m. One year after the price increase, quantity demanded has fallen to 50 mil-

lion gallons per day along Dy. At any given price, D

y is more elastic than D

m, which is more

elastic than Dw.

50 0 75 95 100 Millions of gallons per day

3.00

$3.50

Pric

e pe

r gallo

n

Dw

D m

Dy

T E A C HDeterminants of Demand Elasticity (continued)Hold up a stapler and ask students how many staples they use in a typi-cal week at school. Ask if they think their demand for staples is elastic or inelastic. Hold up a box of staples. Point out that boxes of 5,000 or more are common. The price of a single staple is likely to be as little as $.0001. Ask students if they would use fewer staples if the price doubled. Point out that the demand for staples is inelastic because their price is so small. A 100 percent increase is insignifi cant and will have little or no impact on the quantity demanded. The same can be said for any product that has a very low price and therefore constitutes a small part of a con-sumer’s total budget. Point out that an increase of as little as 5 percent in the price of a new house would be $5,000 for a $100,000 home. This relatively small price increase might cause many people to put off buying a new house. The demand for expensive items is more likely to be elastic.

GROUP ACTIVITYOrganize students into small teams. Give each team the following list of products and ask them to rank the products from the most to the least elastic. Ask them to explain their rankings to the class. What might happen to these rankings over a long period of time, perhaps fi ve years?

• a drug that controls AIDS infections• a particular brand of laundry soap• table salt

Learning Through GraphicsDirect students to focus their attention on Figure 4.4—Demand Becomes More Elastic Over Time. Point out the labels on the three demand curves.

• gasoline for automobiles• tickets to your school’s senior prom• a brand of designer jeans


Direct students to read the short passage titled “We Ate Most of the Big Fish” on this page. Ask students to answer the question.

Think Critically AnswerThe good’s elasticity will increase as more substitutes become available. Sellers such as Loblaws and Whole Foods through marketing are trying to decrease the transition time involved in moving to substitutes.


Some Elasticity EstimatesLet’s look at some estimates of the elasticity of demand for particular goods

and services. As noted earlier, the switch to lower-priced substitutes usually takes time. Th us, when estimating elasticity, economists often distinguish between a period during which consumers have little time to adjust—call it the short run—and a period during which consumers can more fully adjust to a price change—call it the long run. Figure 4.5 provides some short-run and long-run elasticity estimates for selected products.

Th e elasticity of demand is greater in the long run because consumers have more time to adjust. For example, if the price of electricity rose today, consumers in the short run might cut back a bit on their use of electrical appliances. Th ose in homes with electric heat might lower the thermostat in winter. Over time, however,

We Ate Most of the Big FishAbout 80 percent of the big fi sh—such as giant tuna, swordfi sh and Chilean seabass—are gone from the world’s oceans mainly due to overfi shing to satisfy world demand. The Whole Foods Market grocery chain is partnering with Blue Ocean Institute and Monterey Bay Aquarium to drive down demand for these endangered fi sh. The company is the fi rst national grocer to institute a color- coded sustainability-rating program for wild-caught seafood and plans to phase out the sale of some species. This will complement Whole Foods’ ongoing part-nership with the Marine Stewardship Council (MSC), the world’s leading certifi er of sustainable wild-caught seafood. The colors will range from “Green,” a best choice that is relatively abundant, to “Yellow” signifying a good alternative but with some sustainability concerns, to “Red” for species that should be avoided due to overfi shing.

Another MSC partner is Canada’s largest supermarket chain, Loblaws. This has resulted in customers being greeted by empty trays in the deep-sea fi sh coun-ters. Many have seen a note suggesting they consider tilapia or sole instead. Like Whole Foods, Loblaws is committed to off ering only seafood coming from sus-tainable sources. It already has stopped selling Chilean seabass, orange roughy, bluefi n tuna, and shark. Loblaws hopes its decisions will have a real impact on seafood supplies as well as raise awareness and improve worldwide fi shing practices.

Think Critically How does the commitment by Whole Foods and Loblaws to selling sustainable seafood aff ect the demand for those products?

Sources: “Take a Pass on Chilean Sea Bass,” U.S. Newswire, April 21, 2006; Kenneth R. Weiss, Los Angeles Times, “Study Finds Industrial Fleets Have Stripped Oceans of Big Fish,” Las Vegas Review Journal, May 15, 2003; “Whole Foods Market - Empowers Shoppers to Make Sustainable Seafood Choices with Color-Coded Rating System- Partners with Monterey Bay Aquarium and Blue Ocean Institute to Create Science-based Wild-caught Seafood Rating Program; Plans to Phase Out Red-rated Species,” PR Newswire (USA) September 13, 2010; and “Loblaw Modifi es Select Fresh Fish and Seafood Counters to Highlight “at risk” Fish and Suggested Alternatives,” Canada Newswire, February 4, 2010.

T E A C HDeterminants of Demand Elasticity (continued)Ask students to imagine that they are about to take a major test such as the SAT or ACT and they realize that they do not have a No. 2 pencil. Only one person has an extra pencil, but he refuses to sell it for less than $5. Ask students if they would pay $5. What does this show about time and the elasticity of demand for products?


Learning Through GraphicsDirect students to focus their attention on Figure 4.5—Selected Elasticities of Demand. Point out that, in the long run, elasticity for demand is greater for all the products shown.

T E A C HDeterminants of Demand Elasticity (continued)Introduce this topic by asking students to estimate the number of students in their school who are smokers. When the elasticity of demand for young smokers is 1.3, what impact would a 10 percent increase in the price of cigarettes have on the number of these smok-ers? For example, if the number of smokers were 300, a 10 percent increase in price would reduce this number to 261 (300 × 0.87 = 261).


FIGURE 4.5 Selected Elasticities of DemandWhen estimating elasticity, economists distinguish between the short run (a period during which consumers have little time to adjust to a price change) and the long run (a period during which consumers can more fully adjust to a price change). Demand is more elastic in the long run because consumers have more time to adjust.

consumers would switch to more energy-effi cient appliances, insulate their homes better, and might convert from electric heat to oil, natural gas, or solar heat. So the demand for electricity is more elastic in the long run than in the short run, as noted in Figure 4.5. In fact, for each product listed, demand is more elastic in the long run than in the short run.

An Application: Teenage SmokingAs the U.S. Surgeon General warns on each pack of cigarettes, smoking ciga-

rettes can be hazardous to your health. Researchers estimate that smoking causes more than 440,000 deaths a year in the United States—more than 10 times the fatalities from traffi c accidents.

One way to reduce smoking is to raise the price of cigarettes through higher cigarette taxes. Economists estimate the demand elasticity for cigarettes among teenage smokers to be about 1.3, so a 10 percent increase in the price of cigarettes would reduce teen smoking by 13 percent. Among adult smokers, the estimated elasticity is only 0.4, or only about one-third that of teenagers.

Why are teenagers more sensitive to price changes than adults? First, recall that one of the factors aff ecting the elasticity of demand is the importance of the item

Curriculum Connection—LiteratureAuthor Suzanne Collins has written a series of books that has sold many millions of copies in almost every nation of the world. Ask students to discuss the elasticity of demand for these books. What would happen to the number of these books sold if their price were 10 or 20 percent higher? Is demand for her books elastic or inelastic? How do they know? Why might the publisher choose to sell the books for less as time goes by?


R E T E A C HMany people collect baseball cards. It is relatively easy to fi nd cards for current players. It is much more diffi cult to fi nd rookie cards for famous players from the past. Ask students to discuss the elasticity of demand for a Roger Maris or Mickey Mantle rookie card. Why can owners of these cards ask for high prices without fear of being unable to sell them?


in the consumer’s budget. Th e share of income that a teenage smoker spends on cigarettes usually exceeds the share for adult smokers. Second, peer pressure is more infl uential in a young person’s decision to smoke than in an adult’s decision to continue smoking. (If anything, adults face peer pressure not to smoke.) Th e eff ects of a higher price get multiplied among young smokers because a higher price reduces smoking by peers. With fewer peers smoking, there is less pressure to smoke. And third, because smoking is addictive, young people who are not yet hooked are more sensitive to price increases than are adult smokers, who are already hooked.

What are the determinants of demand elasticity?

Common Core Ratios and Proportional RelationshipsYou can calculate the percent change in a value by dividing the amount of the change by the original value changed and then converting the quotient to a percent. To make the conversion, multiply by 100, or move the decimal point two places to the right.

EXAMPLE Find the percent change in the price of eggs if the price increased from $1.50 a dozen to $1.68 per dozen.

SOLUTION Subtract the smaller price from the larger price. Divide the result by the origi-nal price. Convert that answer to a percent by moving the decimal point two places to the right.

$1.68 − $1.50 = $0.18

$0.18 ÷ $1.50 = 0.12

0.12 = 12%

The price of eggs increased by 12%.

Practice the Skill For each situation, fi nd the percent change in price and the resulting percent change in quantity demanded.

1. The quantity of milk demanded by consumers depends on the price. When the price of a gallon of milk rose from $3.25 to $3.51, sales fell from 200 gallons per day to 190 gallons per day.

2. The quantity of pizzas ordered changes when the price of pizza changes. When a pizza sold for $8 instead of $10, sales grew from 80 pizzas per day to 120 pizzas per day.

3. One of these products has elastic demand, while the other demonstrates inelastic demand. Identify which is which. Explain your answer.

AnswerThe determinants of demand elas-ticity are the availability of substi-tutes, the share of the consumer’s budget spent of the good, and the timeframe in which the consumer has to work.

Common Core: Ratios and Proportional RelationshipsStandard 7.RP.3Point out to the students that 0.75 and 75% convey the same informa-tion. Explain that 0.75 is easier to use when making mathematical calculations, but 75% is usually clearer in presenting the information.1. $3.51 – $3.25 = $0.26; $0.26 ÷

$3.25 = 0.08; 8% change in the price; (200 – 190 = 10; 10 ÷ 200 = 0.05; 5% decrease in the quantity demanded

2. $10 – $8 = $2; $2 ÷ $10 = 0.2; 20% change in the price; 120 – 80 = 40; 40 ÷ 80 = 0.5; 50% increase in the quantity demanded

3. The demand for milk is inelas-tic because a 7.7% change in its price resulted in a lesser 5% change in the quantity demanded. The demand for pizza is elastic because a 20% change in its price resulted in a greater 50% change in the quantity demanded.


A S S E S SAssign all or part of Lesson 4.2 Assessment on page 118 as home-work or an in-class activity.




4.2 ASSESSMENT

Think Critically1. The store would have to deter-

mine the percentage decline in sales that would result from this increase in price and then divide the percentage change in sales by the 10 percent change in price.

2. There is elastic demand for run-ning shoes at the current price.

3. The store’s total revenue from running shoes would decline because the demand is elastic.

4. There are many brands of cake mix on the market. If the price of one goes up, consumers are likely to substitute other brands. A small percent change in price should cause a much larger percent change in the quantity demanded.

Graphing Exercise5. The price elasticity of demand

is 1.20 (0.20 ÷ 0.167 = 1.20). This is elastic demand. The total revenue would decrease. (This answer does not include a graph. However, the graph shown at the bottom of this page can be used to illustrate the answer.)

Make Academic Connections6. People who are lactose intoler-

ant are not responsive to chang-es in the price of dairy products. On Easter many Christians buy eggs to color and hide for their children, regardless of the price.

7. Students may point out that when there are many baker-ies, it is easy for consumers to substitute one fi rm’s products for another when prices change. Opening a bakery in such a loca-tion would not allow a new fi rm to raise prices without losing many customers. To do so would cause the fi rm’s total revenue to fall.

Items on lists of products identifi ed by the teams should be classifi ed by their elasticity. Explanations should demonstrate students’ understand-ing of elastic and inelastic demand.


Working in small teams, make a list of household tasks that different members of the team are expected to complete regularly. Examples could include cleaning their room or vacuuming their home each Saturday. The team should then work together to identify types of human and capital resources used when they complete the tasks on their list. These could include effort and skills (human resources) and a broom and vacuum (capital resources) used to produce a clean home.

Working in small teams, make a list of household tasks that different members of the team are expected to complete regularly. Examples could include cleaning their room or vacuuming theirhome each Saturday. The team should then work together to identify types of human and capital resources used when they complete the tasks on their list. These could include effort and skills (human resources) and a broom and vacuum (capital resources) used to produce a clean home.

Think Critically 1. What would a shoe store need to do to calculate the elasticity of demand for the running

shoes it sells if it decides to raise its price by 10 percent?

2. If the shoe store fi nds a demand elasticity for its running shoes of 1.3, is this elastic, unit elastic, or inelastic demand?

3. If the shoe store increases its price for running shoes by 10 percent, what would happen to the store’s total revenue from these products?

4. Why should you expect the demand for a particular brand of cake mix to be more elastic than the demand for cake mix in general?

Graphing Exercise 5. Consider this graph, at right, for run-

ning shoes. Note that if the store’s manager increases the price from $60 to $70 (16.7%), the quantity demanded would fall from 50 to 40 pairs per month (20.0%). What is the elasticity of demand? Is demand elastic, unit elastic, or inelastic? Will the store’s total revenue increase, decrease, or remain unchanged as a result of the price increase?

Make Academic Connections 6. Sociology The elasticity of demand for some products is affected by the personal values

of potential customers. Consider devout practitioners of the Hindu religion who believe it is wrong to eat meat. In Hindu communities, the elasticity of demand for meat products is 0.0, or completely inelastic—consumers won’t buy meat no matter what happens to its price. Describe several other situations where other factors are more important to the buying deci-sion than is the price.

7. Entrepreneurship If there are 10 bakeries in a small city, why might the elasticity of demand for the products any one of them supplies be high? Why might this small city not be a good location for you to open another bakery?

4.2 ASSESSMENT

118

TeamWorkWorking in small teams, brainstorm a list of products that most members of the team consume and indicate the average price for each. Estimate how a 10 percent increase in each product’s price would change the quantity demanded. Which products have elastic demand? Which have inelastic demand? Compare your results with those of other teams.

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DEMAND CURVE FOR RUNNING SHOES

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Visualizing the Answer—Graphing Exercise5. This graph can be used to illustrate the answer to

this exercise. An Excel spreadsheet containing this graph, along with supporting data, is available on the Instructor’s Resource CD.


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Demand


T E A C HInstruct students to read the Movers and Shakers feature. Point out that some students may fi nd it helpful to read the article, read the questions at the bottom of the page, and then reread the article.

Think Critically AnswerStudents can think of their career choices in terms of an employer’s demand for their skills. If the skills they possess are in demand but are the same as possessed by a large portion of the workforce, those skills will be elastic and command a low price (wages). However, if the student possesses skills that are in demand but are not widely possessed by other members of the workforce, the demand will be inelastic and command a higher price (wages).


Google’s Vice President of Sales, Bonita Stewart, knows that the four Ps of marketing are not just for marketing products. She discovered how to apply them to her career path as well. The

Google executive has a bachelor’s degree from How-ard University and an MBA from Harvard. She also has worked at IBM and DaimlerChrysler.

Stewart originally majored in journalism, hoping to become a broadcaster like Katie Couric. However, she quickly became more interested in her minor— business.

Stewart interned at IBM during college and then left to get her Master’s degree, returning to the company after her Harvard graduation. She said, “…when I came back [to IBM], I came up with my own [career] path. I was going to follow the four P’s of marketing: pricing, product, place, promotion.”

To learn “pricing” she worked pricing IBM printers and software. She implemented “product” by working on developing IBM’s personal computer business. When she took her fi rst managerial position and moved to Detroit, she had the opportunity to focus on “place,” learning the ins and outs of the distribution aspect of marketing. Later, while working at DamilerChrysler, she learned how to formulate and drive consumer strategy and how to eff ectively “promote” and launch products. When Stewart realized she was not working within her strongest skill set or interest, she chose to return to product marketing with Google.

Stewart carefully built a career that did not follow a straight and traditional path. When asked how she knew it was time to change jobs she said, “Throughout my career, I’ve always been more of an entrepreneur, trying to drive new ideas and being part of change.” By working for Google, Stewart has added fi nance, media, entertainment, and travel to her career portfolio—all industries where advanced digital strategies are part of everyday business.

Stewart stresses the importance of mentors, acknowl-edging “it takes a village” to build a career. She said, “You’re going to meet people along the way. I believe that if you do your best, you’re inquisitive, you have

the desire and you have an audacious goal, others will recognize you. That’s what’s happened to me.” She knows it takes a lot of work for a woman to rise to the top but thinks change is coming. She said, “I see so many talented women and minorities…. That diversity is what drives innovation.”

She suggests that people beginning their careers make a development plan much like they would for marketing a product. She said, “It doesn’t have to be a novel. It could just be a few bullet points that you keep on a piece of paper. It’s your thoughts on your career. If you don’t step back and have that conversa-tion with yourself from time to time, it’s diffi cult to move through your career with some degree of focus and passion.”

Digital marketing is the wave of the future. When Stewart left DaimlerChrysler the company had become an aggressive digital marketer. Google, however, was focusing on the search aspect of its business model instead of going after “brand dollars.” Since Stewart has joined Google, the company has integrated YouTube, DoubleClick, AdMob, and Invite Media into its market-ing model.

Think Critically Bonita Stewart applied marketing principles to her career development. How can you apply the principles of demand to your career development?

Sources: http://sales-jobs.fi ns.com/Articles/SBB0001424053111903520204576480710777456084/Being-a-Googler-Beats-Being-Katie-Couric; http://adage.com/article/special-report-women-to-watch/women-watch-bonita-stewart-google/227799/; http://www.google.com/events/thinkauto/bios.html; and http://atlantapost.com/2011/08/11/tech-spotlight-bonita-coleman-stewart-vp-us-sales-at-google/

119

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F O C U S

CHANGES IN DEMAND

Ask students to identify a cloth-ing style they once thought was attractive, but that is now out of style. How much would they have been willing to pay for these gar-ments when they were popular? How much would they be willing to pay for them now? Ask students to discuss how this change in demand came about. Why does the fashion industry come out with new styles every year?

ObjectivesRemind students to read the lesson objectives to help focus their atten-tion before reading the lesson.

Key Ter msDirect students to create a database using the key terms for this section. The database fi elds should include terms, defi nitions, and page num-bers. Point out that the process of keying the data is an eff ective way to study the key terms.

In Your WorldFind out from the students the most popular item in the school cafeteria as well as the second most popular item. What would happen to sales of these items if students had more money to spend for lunch? If the price of the second most popular item was reduced? If 200 more students enrolled in school? Or, if a new favorite item was introduced? The student responses will be examples of how the demand curve for these items could be shifted.

Buck Institute Project Based EconomicsThe PBE “High School Food Court” activity ties in with the concepts of consumer tastes, movement along a given demand curve, and shift of a demand curve in Lesson 4.3.

4.3


CHANGES THAT SHIFT THE DEMAND CURVEA demand curve isolates the relationship between price and quan-tity demanded when other factors that could aff ect demand are assumed constant. Th ese other factors are often referred to as determinants of demand. Th e determinants of demand include the following:

1. Consumer income

2. Th e prices of related goods

3. Th e number and composition of consumers

4. Consumer expectations

5. Consumer tastes

How does a change in each aff ect demand?

Changes in Consumer IncomeFigure 4.6 shows the market demand curve D for pizza. Consumers’ money

income is assumed to remain constant along a demand curve. Suppose money income increases. Some consumers are then willing and able to buy more pizza at each price, so market demand increases. Th e demand curve shifts to the right from D to D´. For example, at a price of $12, the amount demanded per week increases from 14 million to 20 million, as indicated by the movement from point b on demand curve D to point f on demand curve D´. In short, an increase

4.3 C H A N G E S I N D E M A N D

Learning Objectives

L 1 Identify the determinants of demand, and explain how a change in each affects the demand curve.

L 2 Distinguish between the money price and the time price of a good.

In Your WorldSo far the discussion of demand has been limited to the relationship between price and quantity demanded. Th at is, your focus has been on movements along a particular demand curve. A demand curve isolates the relation between the price of a good and the quantity demanded when other factors that could aff ect demand remain unchanged. Here you will be introduced to these other determinants of demand and will learn how changes in them aff ect demand.

Key Termstastes 123

movement along a given demand curve 124

shift of a demand curve 124

L 1Identify

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how a

change in

each affects

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Standard 7 Markets and Price



T E A C HChanges That Shift the Demand CurvePoint out that as part of the 2008 Stimulus Bill people who paid income taxes received a rebate of at least $300. Ask students to discuss what this would have done to the demand for most normal and most inferior goods. You might ask them to describe how increased income would have aff ected demand for movie tickets and restaurant meals. Why might it have had less of an impact on sales of board games and other at-home forms of entertain-ment? (Answer: With greater take-home income, consumers may have increased their demand for more expensive forms of entertainment and felt less need to stay at home to save money.)


in demand—that is, a rightward shift of the demand curve—means that consumers are more willing and able to buy pizza at each price.

Normal Goods Goods are classifi ed into two broad categories depending on how the demand for the good responds to changes in money income. Th e demand for a normal good increases as money income increases. Because pizza is a normal good, its demand curve shifts rightward when money income increases. Most goods are normal goods.

Inferior Goods In contrast, the demand for an inferior good actually decreases as money income increases. Examples of inferior goods include bologna sandwiches, used furniture, used clothing, trips to the Laundromat, and bus rides. As money income increases, consumers switch from these inferior goods to nor-mal goods—such as roast beef sandwiches, new furniture, new clothing, a washer and dryer, and automobile or plane rides.

Changes in the Prices of Related GoodsAs you’ve seen, the prices of other goods are assumed to remain constant along

a given demand curve. Now you are ready to consider the impact of changes in the prices of other goods.

Substitutes Products that can be used in place of each other are called substitutes. Consumers choose among substitutes partly on the basis of relative

FIGURE 4.6 An Increase in the Market Demand for PizzaAn increase in the market demand for pizza is shown by a right-ward shift of the demand curve. After the increase in demand, the quantity of pizza demanded increases at each price level. For example, the quantity demanded per week at a price of $12 increases from 14 million (point b) to 20 million (point f ).

0 8 14 20 26 32 Millions of pizzas per week

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Outside ResourcesLocal Television News Reports Events that can shift demand are frequent features on local television news reports. Assign students to identify a story about an event that will cause consumers to purchase more or less of a product. Each student should explain, either to the class or in a written assignment, how the news feature will aff ect demand.Celebrity Endorsements Start a discussion about celebrity endorsements by identifying an athlete, actor, or musician who is currently appearing in an ad campaign endorsing a product. Consider showing a video of a television commercial or projecting a print ad on the board. Ask students what the fi rm hopes will happen to the elasticity of demand for the product because of the celebrity endorsement.

Learning Through GraphicsUse Figure 4.6—An Increase in the Market Demand for Pizza to illus-trate a shift in the demand curve.

Direct students to the Graphing Workshop for Unit 2A, or consider using the presentation as a teaching tool in class. Watch and listen to an explanation about how an increase in demand causes a rightward shift of the demand curve. www.cengage.com/school/contecon



prices. For example, pizza and tacos are substitutes, though not perfect ones. An increase in the price of tacos prompts some consumers to buy pizza instead. Th is is shown in Figure 4.6 by a rightward shift of the demand curve. Two goods are substitutes if an increase in the price of one shifts the demand curve for the other rightward.

On the other hand, a decrease in the price of tacos would reduce the demand for pizza, as shown in Figure 4.7, where the demand curve for pizza shifts to the left from D to D". As a result, consumers demand less pizza at every price. For example, at a price of $12, the amount demanded decreases from 14 million to 10 million per week, as indicated by the movement from point b on demand curve D to point j on demand curve D".

Complements Certain goods are often used in combination. Pizza and soft drinks, milk and cookies, computer hardware and software, and airline tickets and rental cars are complements. If two goods are complements, a decrease in the price of one increases the demand for the other. For example, a decrease in the price of soft drinks shifts the demand curve for pizza rightward.

FIGURE 4.7 A Decrease in the Market Demand for PizzaA decrease in the demand for pizza is shown by a leftward shift of the demand curve. After the decrease in demand, the quantity of pizza demanded decreases at each price level. For example, quantity demanded per week at a price of $12 decreases from 14 million (point b) to 10 million (point j).

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T E A C HChanges That Shift the Demand Curve (continued)Ask students to imagine that the price of energy they use to heat their homes has increased by 100 percent over the past year. Ask them to identify diff erent ways such a price increase would aff ect their lives. What products would they buy more of (home insulation, sweaters, better windows), and which they would demand fewer of (water for long showers, new home additions, heated swimming pools)? How do these changes demonstrate changes in demand that result from changes in the price of substitute and complementary products?

Learning Through GraphicsUse Figure 4.7—A Decrease in the Market Demand for Pizza to illus-trate a shift in the demand curve.

Direct students to the Graphing Workshop for Unit 2A, or consider using the presentation as a teach-ing tool in class. Watch and listen to an explanation about how a decrease in demand causes a left-ward shift of the demand curve.www.cengage.com/school/contecon

The Teaching EconomistThe Teaching Economist is a semi-annual newsletter that, since 1990, has aimed to make teaching economics more fun and more eff ective. William A. McEachern, of the University of Connecticut, is Founding Editor. All issues are available at http://www.cengage.com/economics/mceachern/theteachingeconomist

An article in issue 34, “Teaching, Thinking, and Learning ,” suggests that the goal of teaching economic concepts, such as market demand, is to generate learning that is durable, fl exible, and transferable in a generalized way to new situations.


Students might point out the need for day care centers, grocery stores, and gasoline stations in an area that is experiencing growth due to con-struction of aff ordable housing, an infl ux of young families, and a high birthrate. In an older community where the population is aging, there might be an increase in the demand for travel agencies, home repair services, and medical services.

T E A C HChanges That Shift the Demand Curve (continued)Point out that the demand for many products is seasonal. Ask students how much their family would be willing to pay for a cut evergreen tree in July. Why are many families willing to pay as much as $100 for this item at the beginning of December? Why would a business be unlikely to sell many colored eggs in November or pumpkins in February? How do these situations demonstrate changes in demand that take place as tastes change during each year?

InvestigateYour Local Economy


Changes in the Size or Composition of the Population

Th e market demand curve is the horizontal sum of the individual demand curves of all consumers in the market. If the population grows, the number of consumers in the market increases, so demand increases. For example, if the population grows, the demand curve for pizza shifts rightward. Even if the total population remains unchanged, demand could shift as a result of a change in the composition of the population. For example, an increase in the teenage population could shift pizza demand rightward. A baby boom would increase the demand for car safety seats and baby food. A growing Latino population increases the demand for Latino foods.

Changes in Consumer ExpectationsAnother factor assumed to be constant along a given demand curve is consum-

er expectations about factors that infl uence demand, such as incomes and prices. A change in consumer expectations can shift the demand curve. For example, your demand for some goods may increase after you line up a summer job, even before that job begins.

Changes in price expectations also can shift demand. For example, if you expect pizza prices to jump next week, you may buy an extra one today for the freezer, thereby shifting the demand curve for pizza rightward. Or if consum-ers come to believe that home prices will climb next year, some increase their demand for housing this year, shifting the demand curve for housing rightward. Th e expectation of lower prices has the opposite eff ect. For example, during the recession of 2008–2009, people expected home prices to continue falling, so they put off buying one, shifting the demand for housing leftward.

Changes in Consumer TastesDo you like anchovies on your pizza? How about sauerkraut on a hot dog? Is

music to your ears more likely to be rock, country, heavy metal, hip-hop, reg-gae, jazz, Latin, gospel, New Age, or classical? Choices in food, music, clothing, reading, movies, TV shows—indeed, all consumer choices—are infl uenced by consumer tastes.

Tastes are your likes and dislikes as a consumer. Tastes are assumed to remain constant along a given demand curve. What determines your tastes? Your desire to eat when hungry and to drink when thirsty are largely biological. So, too, is your desire for shelter, comfort, rest, companionship, personal safety, and a pleasant

To learn more about the economics of consumption, read Jane Katz’s “The Joy of Consumption” in the Federal Reserve Bank of Boston’s Regional Review. Access this article through the URL shown below. What evidence does Katz cite about how the rising value of time has aff ected consumer spending patterns?


Examine changes or trends in the composi-tion of the population of your city or town. What products or categories of products might these changes aff ect?

tastes A consumer’s likes and dislikes

123

Remind students to click on the link for Chapter 4 to fi nd the appropriate link for the NET Bookmark on this page.www.cengage.com/school/contecon

AnswerAccording to the article, the rise in the value of time has resulted in increased spending on time-saving services such as store-bought clothing, processed foods, and restaurant meals.

E N R I C HThe price of imported crude oil has fl uctuated widely in recent years from as low as $20 to as high as $130 per barrel. As a result, the price of gasoline has also fl uctuated. Ask students to identify goods or services that are complementary products to gasoline and explain how the demand for these products would have increased or declined because of the changes in the price of gasoline. Examples would include automobile tires, hotel stays, admission to national parks, and crossings purchased at toll bridges.


Think Critically Through VisualsDirect students to focus their at-tention on the photograph on this page. Ask for a volunteer to answer the question posed in the caption.

AnswerAnswers will vary. Changes in taste are diffi cult for economists to isolate since other factors may, at least in part, account for any changes in demand. For instance, price, avail-ability of substitutes, advertising, consumer reporting, availability, and fads are among the factors that by themselves or together may have an eff ect on consumer tastes.

Extend the ContentFirms that produce products that have inelastic demand enjoy a degree of monopoly power in their markets. They know that if they increase their prices they will lose relatively few sales and their total revenue will grow, at least in the short run. In the long run, however, this can cause problems. In the 1960s demand for U.S. automo-biles was quite inelastic. As prices were raised by manufacturers, sales remained strong. In the 1970s, foreign competition caused great diffi culties for U.S. automakers. Discuss what happened to the elasticity of demand for U.S. automobiles as a result of foreign competition.


environment. Your family background, surrounding culture, and peer infl uence all shape many of your tastes.

Generally, economists claim no special expertise in understanding how tastes develop and can change over time. Economists recognize, however, that tastes are important in shaping demand. For example, although pizza is popular, some people just don’t like it and others might be allergic to the cheese, tomatoes, or the gluten in the pizza dough. Th us, most people like pizza but some don’t. A change in tastes for a particular good would shift the demand curve. For example, a discovery that the combination of cheese and tomato sauce on pizza promotes overall health could aff ect consumer tastes, shifting the demand curve for pizza to the right.

But a change in tastes is diffi cult to isolate from other economic changes. Th at’s why economists attribute a change in demand to a change in tastes only as a last resort, after ruling out other possible explanations.

Movement Along a Demand Curve Versus a Shift of the Curve

Remember the distinction between a movement along a demand curve and a shift of a demand curve. A change in price, other things constant, causes a movement along a demand curve, changing the quantity demanded. A change in one of the determinants of demand other than price causes a shift of a demand curve, changing demand.

What are the fi ve determinants of demand, and how do changes in each shift the demand curve?

When analyzing changes in demand for specifi c goods and services, why do you think changes in consumers’ tastes are diffi cult for economists to isolate?

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movement along ademand curve Change inquantity demanded resulting from a change in the price of the good,other things constant

shift of a demand curve Increase or decrease in demand resulting from a changein one of the determinants of demand other than the price of the good

124

AnswerThe fi ve determinants of demand are: (1) Consumer income—a rise in income causes an outward shift of the demand curve. (2) The price of related goods—a rise in this causes an outward shift of the demand curve. (3) Number of consumer’s in the market—a rise in this causes an outward shift of the demand curve. (4) Consumer expectations—a rise in this causes an inward shift of the demand curve. (5) Consumer tastes—a change in this could shift the demand curve either inward or outward.

T E A C HThe Role of Time in Demand(p. 125) Point out that some families make a point of eating together and sharing their daily experiences around the dinner table. These families do not care what the price of fast food might be because they almost never choose to buy any. Then ask students how such a family’s demand for fast food might change if the person who normally does the cooking became ill and could no longer prepare the family’s meals. In such a case, is it food alone that is being demanded? What does fast food off er consumers in addi-tion to sustenance?



THE ROLE OF TIME IN DEMANDBecause consumption does not occur instantly, time plays a role in demand analysis. Consumption involves a money price and a time price. It is not the microwave oven, personal computer, airline trip, or pain medicine that you value but the services each provides. Other things constant, you would pay more to get the same benefi t in less time, as with faster ovens, computers, airline trips, or pain relief. Th at’s also why you are willing to pay more for ready-to-eat foods that you don’t need to prepare yourself.

Your willingness to pay more for time-saving goods and services depends on the opportunity cost of your time. Diff erences in the value of time among consumers help explain diff erences in the consumption patterns observed in the economy. For example, a retired couple has more leisure time than a working couple. Th e retired couple may clip discount coupons and search the newspapers for bargains, sometimes even going from store to store for particular grocery items on sale that week. Th e working couple may ignore the coupons and sales, eat out more often, and purchase more at convenience stores, where they are willing to pay extra for the convenience. Th e retired couple is more inclined to drive across country on vacation, whereas the working couple fl ies to a vacation destination.

Diff erences in the opportunity cost of time among consumers shape consump-tion patterns. Th is adds another dimension to demand analysis.

What’s the difference between the money price of a good and its time price?

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R E T E A C HPropose the following scenario. A major computer manufacturer, G-Tech, is having a giant 35 percent off sale for its laptop computers while other producers of laptops have left their prices unchanged. Ask students to explain what will happen to the demand curves for both G-Tech computers and other manufacturers’ products. Remind them that when the price of a product changes, there will be movement along its demand curve, so there will be no shift in the demand curve for G-Tech computers. The other manufacturers, however, produce substitutes for G-Tech computers. The demand curves for their products will shift to the left as more people buy G-Tech computers instead of other brands.


AnswerAnswers will vary. Most students will be able to point to an item for which they or their friends are willing to pay more money. Data plans on Smartphones, iPods, laptops, or certain brands of jeans or sunglasses are items they may suggest. The students should now realize that these items in general are elastic. However, the desirable ones are often inelastic as they have become more “fashionable” and students are less likely to pursue a substitute if the price rises.

AnswerMoney price is how much a good costs. Time price is the monetary value you place on having a good that works faster or is more convenient.


A S S E S SAssign all or part of Lesson 4.3 Assessment on page 126 as homework or an in-class activity.




4.3 ASSESSMENT

Think Critically1. An increase will cause people to

substitute bus transportation for driving a car. The demand curve for bus tickets would shift to the right because of this change in the price of a related good.

2. This would cause people to demand more of the product. It would change their tastes and cause the demand curve for the shampoo to shift to the right.

3. The ad would cause people to put off buying until next week. The change in their expectations of future prices would cause their demand curve for towels to shift leftward.

4. Consumers demand “quick oats” because they value the time they spend preparing their breakfast.

Graphing Exercise5. Graphs will show the general

location of the demand curves in relation to the original curve. A sample graph is shown below.

(a) Rightward shift due to a change in tastes. (b) Leftward shift due to a change in tastes. (c) Leftward shift because workers have less income to spend. (d) Rightward shift due to more potential customers near the store.

Make Academic Connections6. Students may point out that the

stock market crash caused many people to feel poor, so they spent less of their income on new goods or services. This reduced sales, caused workers to be laid off , and caused many businesses to fail.

7. Students may point out that these warnings are intended to change smokers’ tastes for ciga-rettes by convincing them that smoking is bad for their health. If successful, the warnings shift the demand curve to the left.

Students identify advertisements and explain how each is designed to shift consumer demand curves to the right.


Working in small teams, make a list of household tasks that different members of the team are expected to complete regularly. Examples could include cleaning their room or vacuuming their home each Saturday. The team should then work together to identify types of human and capital resources used when they complete the tasks on their list. These could include effort and skills (human resources) and a broom and vacuum (capital resources) used to produce a clean home.

TeamWork

Working in small teams, make a list of household tasks that different members of the team are expected to complete regularly. Examples could include cleaning their room or vacuuming theirhome each Saturday. The team should then work together to identify types of human and capital resources used when they complete the tasks on their list. These could include effort and skills (human resources) and a broom and vacuum (capital resources) used to produce a clean home.

Think Critically 1. What would happen to the demand curve for bus tickets if the price of gasoline increased to

$6 per gallon? Which of the determinants of demand would this affect?

2. What would happen to the demand curve for a particular brand of shampoo if a famous movie actress with beautiful hair announces that it is the best shampoo she has ever used? Which of the determinants of demand would this affect?

3. What would happen to the demand curve for towels today if a large store announces a 50- percent-off sale on towels next week? Which of the determinants of demand would this affect?

4. Why might the demand for quick oats that cook in 2.5 minutes be greater than the demand for regular oats that take 10 minutes?

Graphing Exercise 5. Make a copy of the demand curve for

running shoes at a local retailer as shown here. Draw the shift of the demand curve on your copy that would result from each of the following events. Label each shift of the demand curve.a. Many people decide to buy new

running shoes to run in a local marathon.

b. Three months of almost uninterrupted rain keeps most people inside.

c. Income tax rates for most workers are increased by 10 percent.

d. A new housing development is built near the store.

Make Academic Connections 6. History When the stock market crashed in 1929, demand for normal goods fell. Explain

why this happened and how it contributed to the Great Depression. What types of goods sell better in hard times?

7. Health For decades, cigarette manufacturers have been required to place health warnings on their products. What are these warnings intended to do to the demand curves for cigarettes?

Working in small teams, brainstorm a list of TV advertisements you believe are particualrly persuasive. Explain how each is designed to shift consumer demand curves for the product. To which of the determinants of demand do the ads appeal? Compare your work with that of other teams.

4.3 ASSESSMENT

126

Pric

e

20 40 60 80Quantity

0

20

40

60

$80


Demand

Visualizing the Answer—Graphing Exercise5. The answer includes a graph. Students’ graphs

should look similar to the one shown here. There is no precise location for the curves because there is no specifi c data provided. An Excel spreadsheet containing this graph, along with supporting data, is available on the Instructor’s Resource CD.

DEMAND FORRUNNING SHOES

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$100.00

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Quantity

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b and c a and d



The Industrial Revolution began with England’s textile industry in the mid-1700s. Cotton had been around since the 1630s, when it was introduced to Europe from India. Although popular, cotton was considered a threat to the British wool, linen, and silk industries. To protect these industries, Parliament restricted cotton imports. The restrictions lasted until 1736, when Great Britain changed the laws allowing the manufacture and sale of cotton. This marked the beginning of cot-ton manufacturing in the West.

The two basic stages of manufacturing cotton textiles were spinning and weaving. Typically these tasks were done in the home in what was called a cottage indus-try. Entrepreneurs supplied raw materials, such as raw cotton or thread, to a household. Then members of the household would produce thread or cloth for the entrepreneur. Of the two tasks, spinning thread from cotton was simpler, and the spinners produced more thread than the weavers could weave. John Kay’s 1733 invention, the Flying Shuttle, changed much of that. It allowed one weaver rather than two to operate a loom and produce more cloth. As the weaving industry grew, so did the demand for thread.

To satisfy this demand, James Hargreaves invented the Spinning Jenny in the 1760s. With his invention, a single worker could spin multiple threads but produce a relatively weak product. Richard Arkwright invented the Water Frame in 1769. This innovation produced a stronger, coarser thread. Finally, Samuel Crompton’s 1779 Spinning Mule produced a strong yet fi ne thread. Once again spinners were producing more than weav-ers could use.

Edmund Cartwright’s Power Loom, patented in 1785, enabled the British cotton textile production to

explode. In 1796, the country manufactured 21 million yards of cotton cloth. That increased to 347 million yards by 1830. The technological advances, coupled with cotton from the United States, caused the price of cotton cloth to drop. By the early part of the nine-teenth century, Britain was even able to sell cotton cloth in India. With this increased technology and growing exports, the demand for raw cotton increased. Great Britain found in the United States a willing and able supplier.

Think Critically Indicate how the demand curve for raw cotton would shift with each of the Indus-trial Revolution’s technological inventions. Use D

1 for

the cottage industry demand, D2 for John Kay’s Flying

Shuttle, D3 for Samuel Crompton’s Spinning Mule, and D

4

for Edmund Cartwright’s Power Loom.

The Industrial Revolution in England: The Demand for Cotton


18th century English textile mill

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F O C U SSet the stage for the Connect to History feature by reminding stu-dents that the Industrial Revolution marked a fundamental change in human history. The use of machin-ery and the techniques developed in the textile industry would spread to other industries. The technol-ogy of the Industrial Revolution was stimulated because each new advance created and increased demand for the processes that went before it. The result would be a pro-duction bottleneck until technology could catch up.

T E A C HInstruct students to read the Connect to History feature and respond to the problem.

A S S E S SUse the Think Critically question at the bottom of the page to assess the students’ understanding of this feature.

Think Critically AnswerThe demand curve for cotton would shift with each of the Industrial Rev-olution’s technological inventions.

BIBLIOGRAPHYCannon, John, ed. Oxford Companion to British History. New York: Oxford University Press, 1997.Carson, Thomas, and Mary Bonk, eds. Gale Encyclopedia of U.S. History. Detroit: Gale Group, 1999.Michl, H. E. The Textile Industries. Washington, DC: The Textile Foundation, 1938.Puth, Robert C. American Economic History. New York: The Dryden Press, 1988.Watkins, James. King Cotton: A Historical and Statistical Review. New York: Negro University Press, 1969.

Summary

ConsiderAsk students to revisit the questions they were asked to consider at the beginning of the chapter. Students should be able to answer them after studying Chapter 4.• Why are newspapers sold in

vending machines that allow you to take more than one copy? See page 104—Diminishing Marginal Utility.

• How much chocolate do you eat when you can eat all you want? See page 104—Diminishing Marginal Utility.

• What cures spring fever? See page 104—Diminishing Marginal Utility.

• What economic principle is behind the saying, “Been there, done that”? See page 104— Diminishing Marginal Utility.

• Why do higher cigarette taxes cut smoking by teenagers more than by other age groups? See page 116—An Application: Teenage Smoking.

ExamViewUse ExamView® to assess student learning.• Create a chapter test using ques-

tions from the existing test bank.• Add your own questions to the

existing test bank.• Generate multiple forms of a

chapter test.

Study SkillsOff er the following study skills sug-gestions for students as they review this chapter.• Outline the chapter.• Review key terms.• Review Checkpoints.• Work in pairs to quiz each other.

Online ResourcesDirect students to the online resources for this chapter at www.cengage.com/school/contecon• Ask the Expert• Flashcards• Crossword Puzzle• Graphing Workshop• Net Bookmark• Study Tools• Tutorial Quiz



Why do consumers buy less of an item when its price rises?

Chapter 4 Summary

4.1 The Demand CurveA. Demand indicates how much of a product consumers are willing and able to buy at each price dur-

ing a given period, other things remaining constant. The law of demand states that the higher the price, the smaller the quantity demanded, and vice versa.

B. The quantity demanded increases as the price falls because of the substitution effect, the income effect, and diminishing marginal utility. The law of diminishing marginal utility states that each additional unit of a product consumed normally provides less additional utility than the previous unit.

C. Demand for a product can be expressed as a demand schedule or as a graph called a demand curve. Most demand curves slope down from left to right, indicating an inverse relationship between price and quantity demanded. This means that as the price declines, the quantity demanded increases.

4.2 Elasticity of DemandA. Elasticity of demand measures the responsiveness of quantity demanded to a change in price. Elas-

ticity is calculated by dividing the percent change in the quantity demanded by the percent change in price.

B. Demand may be elastic, unit elastic, or inelastic. Elastic demand has an elasticity value greater than 1.0. When demand is elastic, a percent change in price results in a larger percent change in the quantity demanded. Unit elastic demand has a value of 1.0. When demand is unit elastic, a percent change in price results in an identical percent change in the quantity demanded. Inelastic demand has a value less than 1.0. When demand is inelastic, a percent change in price results in a smaller percent change in the quantity demanded.

C. Elasticity of demand can be used to predict what happens to a fi rm’s total revenue when the price changes. When demand is elastic, a price increase reduces total revenue. When demand is unit elastic, a price increase does not change total revenue. When demand is inelastic, a price increase boosts total revenue.

D. A good with many substitutes or that represents a large proportion of the consumer’s budget tends to have elastic demand. A good with few substitutes or that represents a small proportion of the consumer’s budget, tends to have inelastic demand. As a general rule, demand is more elastic the more time consumers have to adjust to a price change.

4.3 Changes in DemandA. There are fi ve general categories of economic events that can cause a demand curve to shift. These

are: (1) a change in the money income of consumers, (2) a change in the price of a related good, (3) a change in the number or composition of consumers, (4) a change in consumer expectations, and (5) a change in consumer tastes.

B. Substitute products are used somewhat interchangeably. An increase in the price of one causes demand for the other to increase. Complementary products are normally used together. An increase in the price of one causes the demand for the other to decrease.

C. The demand for products can be infl uenced by time. Customers who must wait in line to buy a product may decide not to wait. Consumers are usually willing to pay more for goods that offer the same benefi t but in less time.

A S K T H E E X P E R TEncourage students to listen to an expert answer the question, “Why do consumers buy less of an item when its price rises?” Remind them to click on the link for Chapter 4.



1. j. market demand 2. c. demand curve 3. e. individual demand 4. l. quantity demanded 5. m. shift of a demand curve 6. k. movement along a given

demand curve 7. i. marginal utility 8. h. law of diminishing marginal

utility 9. g. law of demand10. p. total revenue11. b. demand (c. demand curve is

also a valid answer)12. d. elasticity of demand13. o. tastes

Review Economic Concepts

14. True15. substitution eff ect16. price, quantity demanded17. d. They show how much profi t

is earned by businesses that sell the product.

18. True19. True



CHAPTER 4 ASSESSMENT

Review Economic Terms

Match the terms with the defi nitions. Some terms will not be used.

_____ 1. The sum of the individual demands of all consumers in the market

_____ 2. A line that shows the quantities of a particular good demanded at various prices during a given time period, other things constant

_____ 3. The demand of a single consumer in the market

_____ 4. The amount of a product that is demanded at a particular price

_____ 5. An increase or decrease in demand that results from a change in a determinant of demand

_____ 6. A change in the quantity demanded that results from a change in the product’s price

_____ 7. The change in total utility resulting from a one-unit increase in consumption of a good

_____ 8. The more of a good a person consumes per period, the smaller the marginal utility of each additional unit consumed, other things constant

_____ 9. The quantity of a good demanded per period is inversely related to its price, other things constant

_____ 10. Price multiplied by the quantity demanded at that price

_____ 11. A relation showing the quantities of a good consumers are willing and able to buy at various prices per period, other things constant

_____ 12. Measures how responsive quantity demanded is to a price change

_____ 13. Consumer preferences; assumed to be constant along a given demand curve


14. True or False A change in the price of a product will not cause that product’s demand curve to shift.

15. The _______?_______ is demonstrated by the fact that people will buy more hot dogs and ham-burgers when the price of pizza increases.

16. Elasticity expresses a relationship between the percent change in _______?_______ and the resulting percent change in _______?_______.

17. Which of the following is false about demand curves?a. They normally slope down from left to right.b. They show the relationship between price and the quantity demanded.c. They can be used to calculate a product’s elasticity of demand.d. They show how much profi t is earned by businesses that sell the product.

18. True or False Quantity demanded at a particular price is represented by an individual point on a demand curve.

19. True or False A fi rm’s total revenue will increase if it raises the price of a product that has an elasticity of demand equal to 0.7.

129

a. complements

b. demand

c. demand curve

d. elasticity of demand

e. individual demand

f. inelastic

g. law of demand

h. law of diminishing marginal utility

i. marginal utility

j. market demand

k. movement along a given demand curve

l. quantity demanded

m. shift of a demand curve

n. substitutes

o. tastes

p. total revenue

q. unit elastic

129Chapter 4 D e m a n d


20. If the total revenue from selling a product declines when the product’s price is increased, the demand for that product is _______?_______.

21. True or False A business is more likely to increase the price of its product if the demand for the product is elastic than if the demand is inelastic

22. Which of the following is the correct formula for the elasticity of demand?

c. % change in the price of the product

% change in the quantity demanded

d. % change in the quantity demanded

% change in the price of the product

a. change in the price of the product

change in the quantity demanded

b. change in the quantity demanded

change in the price of the product

23. True or False Market demand is the demand of an individual consumer.

24. Which of these products is most likely to have elastic demand?a. cable television serviceb. a particular brand of hand soapc. ground black pepperd. taxi service in a large city

25. True or False When consumers earn more income, their demand for normal products will increase.

26. Which of the following is not a determinant of demand?a. consumer incomeb. prices of related goodsc. consumer expectations and tastesd. all of the above are determinants of demand

27. True or False Demand for a normal good decreases as money income increases.

28. One purpose of advertising is toa. shift a product’s demand curve to the right.b. shift a product’s demand curve to the left.c. make a product’s demand more elastic.d. help consumers identify the product’s substitutes

Apply Economic Concepts

29. Market Demand Working in small groups, determine your group’s market demand for gaso-line. Make up a chart listing a variety of prices per gallon of gasoline, such as $3.50, $3.75, $4.00, $4.25, $4.50, $4.75. Each group member should determine how many gallons per week they would purchase at each price. Then do the following:a. Plot each group member’s demand curve. Check to see whether each person’s responses are

consistent with the law of demand.b. Derive the “market” demand curve by adding the quantities demanded by all students at each price.c. What do you think will happen to that market demand curve after your class graduates and your

incomes rise?

20. elastic21. True22. d. % change in the quantity

demanded ÷ % change in the price of the product

23. False. Market demand is the demand of all the consumers together.

24. b. a particular brand of hand soap

25. True26. d. All of the above are determi-

nants of demand.27. False. Demand for a normal

good increases as money increases.

28. a. shift of a product’s demand curve to the right.



29. c. The market demand will increase as incomes increase.



30. Graphing Shifts of Demand Curves The owner of Rita’s Tacos bought ads in a local newspa-per. As a result, the demand for her tacos increased as demonstrated in the demand schedule below. Draw a graph of her demand as it was before the ads were printed. On the same graph, draw the new demand curve for tacos. Explain why many businesses advertise their products.

OLD AND NEW DEMAND SCHEDULE FOR RITA’S TACOS

Price Per Taco Old Quantity Demanded New Quantity Demanded

$2.00 25 75

$1.75 50 100

$1.50 75 125

$1.25 100 150

$1.00 125 175

$0.75 150 200

Digging Deeper with Economics e-Collection

Access the Gale Economics e-Collection through the URL below to fi nd an article about a new product recently introduced to the market. Research a product you already have in mind, or use the search term “new product” to fi nd a product that interests you. Analyze the market for this new product in terms of the determinants of demand: (1) consumer income, (2) the prices of related goods, (3) the number and composition of consumers, (4) consumer expectations, and (5) consumer tastes. Based on your analysis, predict whether or not the product will be successful. Prepare a PowerPoint presentation or create handouts to present your analysis and fi ndings.


31. 21st Century Skills: Communication and Collaboration Working with a partner, identify a specifi c product you both do not own but would like to purchase. Write down the most you would be willing to pay for this product. Investigate three businesses that sell the product by using the Internet or a local newspaper. Summarize your fi ndings in a few sentences that identify the busi-nesses and list the prices they charge. With your partner, discuss how you would choose which business to buy from. Remember, price may not be the only factor you consider when making your choice.

30. Answers will vary. Students may point out that businesses pay for advertising because they hope to increase the demand for their products. Advertising also is used to tell potential custom-ers about sales or things about their products that distinguish them from those of its competi-tors. The companies believe that advertising will increase their profi tability. See visual at the bottom of this page.

31. Answers will vary. Each pair of students should identify products they want to own and where these products could be purchased. They should then logically explain how they would choose where to make their purchase.


Before assigning the feature to stu-dents, tell them that that one of the most diffi cult things in business is to successfully launch and promote a new product in the marketplace. Because of this, most new products fail. Point out this is sometimes because companies do not success-fully do the necessary research and analysis or that they misunderstand the results of that research and analysis.

Digging Deeper

Visualizing the Answer—Apply Economic Concepts30. Students’ graphs should look similar to the one

shown here. An Excel spreadsheet containing this graph, along with supporting data, is available on the Instructor’s Resource CD.

OLD AND NEW DEMAND CURVE FOR RITA'S TACOS

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131Chapter 4 D e m a n d

94171 ch04 ptg01 hr 098-131 - air academy high school · lesson 4.2 elasticity of demand in...

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