How many students would demand a cell phone that costs $3,995? That was the price of the first cell phone available to the public, the DynaTAC8000X, in 1983. By 2011, the average price of a smartphone was $135, and more people were buying cell phones. In this lesson, students will learn about demand and its determinants by examining the Internet subscription, food, and car industries.

KEY CONCEPTS

Demand, Determinants of Demand, Income, Law of Demand, Price, Quantity Demanded

STUDENTS WILL

  • Develop the law of demand through participatory class exercise
  • Explore the determinantsof demand
  • Analyze demand curves and demonstrate understanding of the determinants of demand
  • Compare movements along the demand curve to demand curveshifts
  • Understand the difference between a change in quantity demanded and demand

INTRODUCTION

Imagine walking into a cell phone store, and everything costs one dollar. Many people would buy a phone at that price. Now, think about what would happen if each cell phone cost one thousand dollars, instead. Not as many people would be able to afford a cell phone at this higher price. In economics, demand is being able and willing to buy a good or service. At a price of one dollar, demand was high because many people were able and willing to afford cell phones. But when the cell phone cost one thousand dollars, demand was lower because fewer people were willing or able to pay that price.

RESOURCES

  • Chalkboard or SMART board to record the results of the cell phone class survey
  • Demand Vocabulary Crossword Puzzle: This activity reinforces the vocabulary associated with the law of demand, determinants of demand, and demand graphs. Teacher's Version (NOTE: It is better to open the crossword in Chrome because in Firefox the numbers get distorted)

PROCESS

Activity 1: Analyze the relationship between price and quantity demanded.

  1. Ask the students to indicate their preferences for cell phones at different price levels. How many students would demand a cell phone at a price of $50, $100, $150, or $200? (Remind the students that demand is not only about wanting a product, but also being able to afford it).
  2. Use the data collected from the survey and plot a demand curve. Note the inverse relationship that describes the law the demand: As the price of a good increases, quantity demanded decreases (all other things being equal) and visa versa.
  3. Insert the results of the survey into a demand schedule and a graph (as shown below). Discuss how the results illustrate the law of demand (as price increases, quantity demanded decreases).

Demand Schedule for Cell Phones

                  Price

             Quantity Demanded

             $  50.00

 

             $100.00

 

             $150.00

 

             $200.00

 

 

                  Demand Curve for Cell Phones 

Use the data collected through student responses to construct a downward sloping demand curve: 

Label price axis with $50, $100, $150, and $200 and quantity axis with student responses. Point out to the students that movements along the demand curve illustrate that higher prices are associated with lower quantities demanded; while lower prices result in higher quantities demanded.

4. Examine the application of the law of demand in the Internet subscription industry with "Netflix Controversy ."

  After the students are finished watching the video, discuss the following questions:

a. According to the video, what happened to the quantity demanded of Netflix products when the company raised its prices by up to 60 percent? [Quantity demanded decreased by one million subscribers.]

b. How does this illustrate the law of demand? [A higher price reduced the quantity demanded.]

Activity 2: Explore the determinants of demand, which are factors that change demand. These factors include income, consumer preference, number of buyers, prices of related goods, and expectations about future income and prices.

       1. Watch the "Rising Food Prices Sour Utah Families " video to explore the determinants of demand in the food market.                  

          After the students are finished, discuss the following questions:

           a. When the price of beef increased, a consumer responded by substituting pork because it was relatively less expensive. Assuming that beef and pork are substitutes, what does this say about the relationship between the demand for a good (like pork) and the price of a substitute (such as beef)? [Demand for a good (like pork) increases when the price of a substitute (like beef) increases.]

            b. Consider that beef hamburgers and hamburger buns are complements, or goods that go together. If the demand for beef decreases, what will happen to the demand for hamburger buns? [Demand for a good (like hamburger buns) will decrease when the price of its complement (like hamburgers) increases.]

            c. The video mentioned the price of ice cream. Suppose that this price is expected to increase in the future. What will happen to the demand for ice cream in the present? [Demand for ice-cream will increase in the present, because people would rather pay lower prices in the present than higher prices in the future for the same product.]

        2. Watch the "Demand for Fuel-Efficient Cars Will Outlast Spike in Gas Prices " video to explore the determinants of demand in the car market. 

            After the students are finished, discuss the following questions:

            a.The video reported that consumer preferences had shifted towards fuel-efficient vehicles. How did this influence the demand for fuel-efficient cars, such as the Chevrolet Impala? [The demand for fuel-efficient cars increased.]

            b. According to the video, the number of GM car buyers included more European consumers. How does this increase in the number of buyers affect the demand for GM cars? [The demand for GM cars increases.]

        3. Watch the income effect  video to explore how income affects demand: 

            After the students are finished, discuss the following questions:

            a. Based on the lesson from the video, would frozen vegetables be considered a normal or inferior good? Encourage students to explain their responses. [Frozen vegetables are inferior goods. As income increases, the demand for frozen vegetables decreases. In the video, an increase in income caused consumers to buy fewer of the least expensive cars. Instead, consumers chose to buy more expensive cars, because they could now afford them. Likewise, consumers would buy fewer frozen vegetables. Instead, they would buy more expensive fresh vegetables, because they can now afford them.]

            b. The video reported that laptops are normal goods. Are other electronics, like music players, cell phones, and televisions also normal goods? Encourage students to explain their responses. [Music players, cell phones, and televisions are normal goods. There is a positive relationship between their demands and income. As income increases, the demand for these goods increase. As income decreases, the demand for these goods also decrease.]

             c. Explain shifts of the demand curve as demonstrated in the video. Shifting the demand curve to the right shows an increase in demand. This shift indicates that quantity demanded is higher at each price level. In the video, an increase in income caused the demand curve to shift to the right for normal goods. Shifting the demand curve to the left shows a decrease in demand. This shift means that quantity demanded is lower at each price level. In the video, an increase in income caused the demand curve to shift to the left for inferior goods.

            d. Ask the students to consider how future expectations of income affect demand. For example, if the students expect their incomes to increase in the future, how will this affect their demand for most goods and services in the present? [Consumer demand in the present will increase with future expectations of higher incomes. Consumers now view themselves as possessing more wealth, because they expect to earn more income.] If students expect their future incomes to decrease, how will this affect their demand for most goods and services in the present? [Consumer demand in the present will decrease with future expectations of lower incomes. Consumers will decrease current spending to save more money for the future when they have less income.]

ASSESSMENT ACTIVITY

Instruct the students to complete the following activities:

CONCLUSION

At the end of the lesson, students should understand the law of demand: Higher prices result in lower quantities demanded, and lower prices result in higher quantities demanded. This concept is reinforced by the cell phone survey, which allows students to experience the law of demand within the classroom.  Students should also be able to differentiate between quantity demanded and demand. Graphically, changes in quantity demanded are associated with movements along the demand curve; while changes in demand are shown as shifts in the entire demand curve to the right or to the left. Changes in demand result from changes in income, consumer preferences, number of buyers, prices of related goods, and expectations about future income and prices. 

Finally, remind the students that demand curves represent the personal value that consumers subjectively place on items relative to their unit cost or price. For example, someone like Mark Zuckerberg may be able to afford a $3,000 cell phone. He just may not want to purchase it given the alternatives. For example, he could use the $3K to invest in a new Facebook app, donate it to charity, save it, or just sit on it. However, the opportunity cost of purchasing a phone decreases, as the price of the phone decreases. This makes purchasing the phone more attractive to Mark and other potential consumers. So, quantity demanded increases, as price falls.

EXTENSION ACTIVITY

First, students read the following passage from Money Matters: An Introduction to Economics by Barbara Gottfried Hollander (Chicago, IL: Heinemann Library, 2011) to learn more about the determinants of demand:

“Specific factors, such as population and climate, also influence demand. Generally, a place with more people (population) will mean there is a higher demand for goods and services. This is because there are more consumers to buy products. Different climates also affect the demand for certain products. For example, people demand more ski equipment in cold climates, but swimsuits in warmer areas.”

Then, they read this article from The New York Times (“Warm Winter Deflates Prospects for Retailers” by Stephanie Clifford, 01/18/2012) to find out how a warmer winter affected the demand for winter clothing, salt for icy walkways, and even flu shots

Finally, students will answer the following question in 1-2 sentences:

Based on The New York Times article, how did weather conditions affect the demand for winter-related products? [A warmer winter decreased the demand for winter-related products. Consumers did not buy products for colder weather, because they did not expect to need them.]

EDUCATOR REVIEWS