1. Understanding Consumer Demand
Chapter 5
Understanding Consumer Demand

2. The Basics of Consumer Demand
Two principles of consumer behavior:
Select the item that gives consumers the highest level of utility (satisfaction)
The principle of diminishing marginal utility (additional satisfaction)
The role of scarcity
How price allocates scare resources

3. 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

4. Demand Shifters Demand shifters: Population10 20 30 40 50
Quantity $1 $2 $3 $4 $5
Price Q2
Price Quantity Quantity 2 $ $ $ $ $ Q1
Demand shifters:
Population
Consumer taste and preference
Income
Price of substitutes
Price of complements

5. 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

6. What does this tell a business manager?
Price Elasticity
% change in quantity
Ep =
% change in price
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
Ep = =
+25%
-50%
= -2
What does this tell a business manager?

7. Cross-Price Elasticity
% change in price of a competitor’s
or complementary product
% change in quantity
Ecp =
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
Ecp = =
+100%
-20%
= -0.2
What does this tell a business manager?

8. What does this tell a business manager?
Income Elasticity
% change in income
% change in quantity
Ey =
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
Ey = =
+10%
+20%
= +2
What does this tell a business manager?

9. Relationship Between Price, Total Revenue, and Elasticity
Ep Elasticity Effect on total revenue
< 1 Inelastic Price rise → total revenue up
Price decline → total revenue down
= 1 Unitary Price rise → total revenue unchanged
Price decline → total revenue unchanged
>1 Elastic Price rise → total revenue down
Price decline → total revenue up

10. Why Demand for a Single Food Is Elastic
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

11. Discussion Topics
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.
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.

12. 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.

13. 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?
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?

14. 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?

15. 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 firm’s marketing plan and marketing mix?
Since few substitute goods exists for food, why don’t farmers just raise prices in order to get themselves a decent income? Do you agree or disagree with this statement? Explain your answer.