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Tutorial 6: Consumer and Market Demand (cont.)

 

Shifting the Demand Curve

So far we've been able to establish that the consumer choice model generates an individual consumer's demand curve that shows an inverse relationship between price and the quantity demanded, cæteris paribus, as predicted by the law of demand.

But what if cæteris is not paribus? In Tutorial 3, we saw that if one of the non-price determinants of demand (i.e., P-PINE) is changed while price, and everything else, is kept constant, the demand curve will shift. Question 2 in the Consumer Demand Workbook is devoted to this issue, so I'll just outline the steps here.

Figure 4 showed the demand curve generated by manipulating the price of food in the consumer choice model, holding income and all other parameters in the model constant. So now we'll change income and then measure the quantity of food demanded at each of the two prices used in the previous example.

Suppose income rises to $100 per period, and Pf = $2 per unit and Pc = $2 per unit. Draw a new graph of the consumer choice model showing the consumer at the optimum bundle of F and C. Because the budget line has shifted outward, I am confident that the new consumption of food will be greater than 20 units per period -- let's say it's 25 units per period.

Now, once again, raise the price of food to $8 per unit, holding the other variables constant. Modify your graph of the consumer choice model to show the consumer at the new optimum bundle of F and C. Because the budget line has shifted outward, I am confident that the new consumption of food will be greater than 5 units per period -- let's say it's 6 units per period. Table 2 shows the results of this little experiment.

Table 2

Pf QfD u(F*, C*) PC Income Pref's
a & b
$2/unit 20 units/t 400 "utils" $2/unit $80/pd 0.5 0.5
$8/unit 5 units/t 200 "utils" $2/unit $80/pd 0.5 0.5
$2/unit 25 units/t 800 "utils" $2/unit $100/pd 0.5 0.5
$8/unit 6 units/t 300 "utils" $2/unit $100/pd 0.5 0.5

 

Add this new data on price and quantity demanded to your previous graph of the consumer's demand line.

  1. Plot the first price-quantity combination (Pf = $2/unit and Qfd = 25 units/t).
  2. Plot the second price-quantity combination (Pf = $8/unit and Qfd = 6 units/t).
  3. Connect the two points and you have a line representing the consumer's new demand for food when income increased!

Your graph should look like the one in Figure 5.

Figure 5

Graph of individual consumer's demand curve after an increase in income.

The consumer choice model thus predicts that an increase in income, cæteris paribus, will shift the demand curve to the right. [What type of good must food be in this model - Inferior? Normal? Why?]

Now it's time to "do the thing".

Click on the following link to download the Consumer Demand Workbook. Work through Questions 1 - 3 to improve your understanding of the shape, and behavior, of the individual consumer's demand curve generated by the consumer choice model.

Return here when you have finished.

Need help downloading the Excel file?

 

So what have we witnessed? We changed the price of one good in the consumer choice model and kept track of how a change in that price altered the quantity of that good consumed. We used the results to plot the demand curve for an individual consumer. That demand curve, as it turned out, was downward sloping as predicted by the law of demand. Furthermore, the data showed that total satisfaction increased as we moved downward along the demand curve.

In the next tutorial we use the consumer choice model to explain why the individual consumer's demand curve is downward sloping.