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
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.
a & b
Add this new data on price and quantity demanded to your
previous graph of the consumer's demand line.
- Plot the first price-quantity combination (Pf = $2/unit
and Qfd = 25 units/t).
- Plot the second price-quantity combination (Pf = $8/unit
and Qfd = 6 units/t).
- 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.
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
Return here when you have finished.
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.