Would You Demand It?

Average Cell Phone Prices Average cell phone prices in recent years have changed dramatically, jumping from $135 in 2011 to $531 in 2013 and $567 in 2017. Why do you think prices increased during this time period? (Answers should include an increase in the number of features, memory, etc.)

Demand Schedule for Cell Phones Price Quantity Demanded $50.00 $100.00 $150.00 $200.00 $250.00 Tell students they have a maximum of $250 to spend. With that amount available, ask how many cell phones they would purchase at each price level. Record their answers on the board. Tell them their answers represent the market demand for cell phones.

Plotting the Demand Schedule Have them plot the class market demand on a graph, using price on the vertical axis and quantity on the horizontal axis. They should have a down-sloping demand curve, depicting the law of demand: higher prices decrease the quantity demanded and lower prices increase the quantity demanded.

Demand and Supply Explained/Econ 2.1 This video reviews the reasons for a down-sloping demand curve and the factors that shift the demand curve. Ask students if they only consider price when buying a cell phone or other products. Answers should be no because they look at other features, such as size, brand, etc. Tell students these other factors are called non-price determinants of demand. In other words, something other than price may determine what they purchase but price sets the boundaries for what they are willing and able to do. These non-price factors are also called shifters of demand, which are illustrated in the video.

Changes in Quantity Demand vs Changes in Demand Substitution Effect Income Effect Law of Diminishing Marginal Utility Changes in Demand Tastes and Preferences Number of Consumers Price of Related Goods Substitutes and Complements Income Normal vs Inferior Goods Expectations Three factors explain changes in the quantity demanded: substitution effect, income effect, and the law of diminishing marginal utility. Substitution Effect: Changes in price motivate consumers to buy relatively cheaper goods instead of higher priced goods (substituting cheaper priced goods for higher priced goods). Income Effect: Changes in price affect consumers’ purchasing power; those with higher incomes can afford to purchase more than those with lower incomes. Law of Diminishing Marginal Utility: Consuming more of a given product eventually reduces the satisfaction (utility) received from each additional product; the only way to motivate consumers to buy more is to reduce the price (lower prices “match” their reduced satisfaction.) Price is the only variable that drives these changes. There are other non-price determinants/factors that shift the entire demand curve to the right (increasing demand) or to the left (decreasing demand): tastes/preferences; number of consumers; price of related goods; income of consumers; and consumer expectations. Tastes/Preferences: we are willing to pay more for things we like or prefer, which increases demand for those products (and vice versa). The number of consumers: As more people want to buy a specific product, demand is increased (and vice versa). Price of related goods: The price of other goods affects the demand for some products (substitutes and complements). If the price of Product A increases, consumers will purchase more of Product B as a substitute… for example, assume hamburger and steaks are substitute goods (cow’s milk and almond milk in the video)… when the price of steaks (cow’s milk) goes up, people will buy more hamburger (almond milk). If Products A and B are complements, consumers will purchase less of both if the price of one increases (milk and cereal in the video)… for example, assume peanut butter and jelly are complements… when the price of peanut butter (milk) goes up, consumers will purchase less jelly (cereal) because consumers always use them together. Income: As consumer income increases, they usually prefer to buy normal goods instead of inferior goods. A normal good is basically their first choice and an inferior good is their second choice; it doesn’t mean a product is “bad” or “poor quality”. Go back to the steak vs hamburger. For most people, steak would be the first choice (normal good) and hamburger the second choice (inferior good). As income increases, all things being equal, consumers will buy more steak and less hamburger (and vice versa). Expectations: If consumers expect higher prices, they will increase their demand now instead of waiting to make the purchase (and vice versa).

What is the future of retail? Would a decrease in prices at Payless increase the demand for their shoes or the quantity demanded? Based on comments in the video, would Payless shoes be considered inferior or normal goods? Would shoes purchased at Kohls, Walmart or DSW be considered substitutes or complementary goods? Using the comment “the thrill of the hunt”, how might tastes and preferences for shopping affect the market for shoes? How has access to technology impacted the shift to online shopping? What do you expect the future trend in retail shopping to be? Answer Key: Quantity demanded because a “sale” represents a drop in price, which motivates consumers to buy more. They would be considered an inferior good because the commentators said people can buy designer shoes for similar prices at competitors such as Marshalls, DSW, etc. Substitute goods. You might also ask if students can identify any complementary goods for shoes (shoe laces, socks, shoe polish, etc.) If people prefer to “hunt” for shoes or other products, then they would tend to prefer to shop in person rather than online; one person also mentioned finding the right fit for shoes being harder online than face to face shopping. It has increased the number of consumers who shop online. Answers will vary.  Most are predicting a decline in mall shopping, which reduces the number of stores available locally.  However, some online merchants are also expanding their “face to face” presence in some markets.  Predicting the future is difficult, but retailers will attempt to meet consumers wants and needs in order to stay in business.