Understanding Consumer Demand

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Chapter 5

• Understanding Consumer Demand

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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

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Factors InfluencingConsumer 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

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Demand Shifters
Price Quantity 1 Quantity 2 1
50 60 2
40 50 3 30
40 4 20
30 5 10 20

• Demand shifters
• Population
• Consumer taste and preference
• Income
• Price of substitutes
• Price of complements

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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

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Price Elasticity
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?
What does this tell a business manager?
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Cross-Price Elasticity
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?
What does this tell a business manager?
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Income Elasticity
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?
What does this tell a business manager?
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Relationship Between Price,Total Revenue, and
Elasticity

• Ep Elasticity Effect on total revenue

lt 1 Inelastic Price rise ? total revenue
up Price decline ? total revenue down
1 Unitary Price rise ? total revenue
unchanged Price decline ? total revenue
unchanged
gt1 Elastic Price rise ? total revenue
down Price decline ? total revenue up
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Why Demand for aSingle Food Is Elastic
A all food items B all dairy product C all ice
cream D all vanilla ice cream E Haagen-Dazs
vanilla ice cream
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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.
• Explain why price is the best allocator of
  resources in a free market. Explain how price
  allocates non-scarce resources in a free market.
• Explain why economists made a distinction between
  consumers who are willing to and able to buy a
  product when they talk about effective demand.

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• 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?
• 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?
• 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?
• 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?

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• 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?
• 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.