Presentation on theme: "Chapter 5 Understanding Consumer Demand. The Basics of Consumer Demand Two principles of consumer behavior: 1.Select the item that gives consumers the."— Presentation transcript:
Chapter 5 Understanding Consumer Demand
The Basics of Consumer Demand Two principles of consumer behavior: 1.Select the item that gives consumers the highest level of utility (satisfaction) 2.The principle of diminishing marginal utility (additional satisfaction) The role of scarcity How price allocates scare resources
Factors Influencing Consumer Demand What does demand mean? What does the law of demand mean? Seven factors affecting the demand: Price of the product Price of competitors products (substitute products) Price of complement goods Income Population Taste and preferences Seasonality
Demand Shifters Quantity $1 $2 $3 $4 $5 Price Q1 Q2 Price Quantity 1 Quantity 2 $ $ $ $ $ Demand shifters: Population Consumer taste and preference Income Price of substitutes Price of complements
Demand Elasticity What is elasticity of demand? Classifying the sales response Elastic: the percent change in sales response is greater than the percent change in price Inelastic: the percent change in sales response is less than the percent change in price Unitary: The percent change in sales response equals the percent change in price
Price Elasticity % change in price % change in quantity E p = For example, if the price of caviar increases from $20 to $25 per pound and the quantity demand declines from 100 pounds to 50 pounds, what is the price elasticity of caviar? % change in price of caviar % change in quantity of caviar E p = = +25% -50% = -2 What does this tell a business manager?
Cross-Price Elasticity % change in price of a competitors or complementary product % change in quantity E cp = For example, if the price of crackers increases from $0.50 to $1.00 per pound and caviar sales decrease from 100 pounds to 80 pounds, what is the cross-price elasticity of caviar to crackers? % change in price of crackers % change in quantity of caviar E cp = = +100% -20% = -0.2 What does this tell a business manager?
Income Elasticity % change in income % change in quantity E y = For example, if consumers incomes increase from $30,000 to $33,000 and caviar sales increased from 100 pounds to 120 pounds, what is the income elasticity of caviar? % change in income % change in sales of caviar E y = = +10% +20% = +2 What does this tell a business manager?
Relationship Between Price, Total Revenue, and Elasticity E p ElasticityEffect on total revenue < 1InelasticPrice rise total revenue up Price decline total revenue down = 1UnitaryPrice rise total revenue unchanged Price decline total revenue unchanged >1ElasticPrice rise total revenue down Price decline total revenue up
Why Demand for a Single Food Is Elastic 0 Sales (Quantity Demanded) Price A B C D E A: all food items B: all dairy product C: all ice cream D: all vanilla ice cream E: Haagen-Dazs vanilla ice cream
Discussion Topics 1. Explain how the combination of the consumers desire for utility maximization and the scarcity of resources available to meet them leads to competition in the marketplace and greater happiness by all members of society. 2. Define the terms utility, marginal utility, and the principle of declining marginal utility as used by economists. Explain how these terms lead to people consuming spinach.
Discussion Topics 3.Explain why price is the best allocator of resources in a free market. Explain how price allocates non-scarce resources in a free market. 4.Explain why economists made a distinction between consumers who are willing to and able to buy a product when they talk about effective demand.
5. Explain why the law of demand makes sense for consumers who are always seeking to maximize their total utility from the products they consume. When is consumer demand fully satisfied? 6. Identify and explain the factors that influence consumer demand. Which indicate a shift in consumer demand? Explain why shifts in consumer demand are important to agribusiness managers. What should a manager do if a shift in consumer demand for his or her product is found?
7.Explain why a manager of a fertilizer company needs to pay attention to changes in consumers demand for chicken dinners with mashed potatoes, and the value of the dollar in foreign currency exchanges? 8.Explain why an agribusiness manager should know if the demand for his or her products is elastic or inelastic. How does it help the firm achieve higher profits?
9. What does it mean to an agribusiness firm to find out the income elasticity of its products is positive but less than one? How does this influence the formulation of the firms marketing plan and marketing mix? 10. Since few substitute goods exists for food, why dont farmers just raise prices in order to get themselves a decent income? Do you agree or disagree with this statement? Explain your answer.