<< Chapter < Page Chapter >> Page >

The foundations of a demand curve: an example of housing

The two graphs show how budget constraints influence the demand curve.
(a) As the price increases from P 0 to P 1 to P 2 to P 3 , the budget constraint on the upper part of the diagram shifts to the left. The utility-maximizing choice changes from M 0 to M 1 to M 2 to M 3 . As a result, the quantity demanded of housing shifts from Q 0 to Q 1 to Q 2 to Q 3 , ceteris paribus . (b) The demand curve graphs each combination of the price of housing and the quantity of housing demanded, ceteris paribus . Indeed, the quantities of housing are the same at the points on both (a) and (b). Thus, the original price of housing (P 0 ) and the original quantity of housing (Q 0 ) appear on the demand curve as point E 0 . The higher price of housing (P 1 ) and the corresponding lower quantity demanded of housing (Q 1 ) appear on the demand curve as point E 1 .

So, as the price of housing rises, the budget constraint shifts to the left, and the quantity consumed of housing falls, ceteris paribus (meaning, with all other things being the same). This relationship—the price of housing rising from P 0 to P 1 to P 2 to P 3 , while the quantity of housing demanded falls from Q 0 to Q 1 to Q 2 to Q 3 —is graphed on the demand curve in [link] (b). Indeed, the vertical dashed lines stretching between the top and bottom of [link] show that the quantity of housing demanded at each point is the same in both (a) and (b). The shape of a demand curve is ultimately determined by the underlying choices about maximizing utility subject to a budget constraint. And while economists may not be able to measure “utils,” they can certainly measure price and quantity demanded.

Applications in government and business

The budget constraint framework for making utility-maximizing choices offers a reminder that people can react to a change in price or income in a range of different ways. For example, in the winter months of 2005, costs for heating homes increased significantly in many parts of the country as prices for natural gas and electricity soared, due in large part to the disruption caused by Hurricanes Katrina and Rita. Some people reacted by reducing the quantity demanded of energy; for example, by turning down the thermostats in their homes by a few degrees and wearing a heavier sweater inside. Even so, many home heating bills rose, so people adjusted their consumption in other ways, too. As you learned in the chapter on Elasticity , the short run demand for home heating is generally inelastic. Each household cut back on what it valued least on the margin; for some it might have been some dinners out, or a vacation, or postponing buying a new refrigerator or a new car. Indeed, sharply higher energy prices can have effects beyond the energy market, leading to a widespread reduction in purchasing throughout the rest of the economy.

A similar issue arises when the government imposes taxes on certain products, like it does on gasoline, cigarettes, and alcohol. Say that a tax on alcohol leads to a higher price at the liquor store, the higher price of alcohol causes the budget constraint to pivot left, and consumption of alcoholic beverages is likely to decrease. However, people may also react to the higher price of alcoholic beverages by cutting back on other purchases. For example, they might cut back on snacks at restaurants like chicken wings and nachos. It would be unwise to assume that the liquor industry is the only one affected by the tax on alcoholic beverages. Read the next Clear It Up to learn about how buying decisions are influenced by who controls the household income.

Does who controls household income make a difference?

In the mid-1970s, the United Kingdom made an interesting policy change in its “child allowance” policy. This program provides a fixed amount of money per child to every family, regardless of family income. Traditionally, the child allowance had been distributed to families by withholding less in taxes from the paycheck of the family wage earner—typically the father in this time period. The new policy instead provided the child allowance as a cash payment to the mother. As a result of this change, households have the same level of income and face the same prices in the market, but the money is more likely to be in the purse of the mother than in the wallet of the father.

Should this change in policy alter household consumption patterns? Basic models of consumption decisions, of the sort examined in this chapter, assume that it does not matter whether the mother or the father receives the money, because both parents seek to maximize the utility of the family as a whole. In effect, this model assumes that everyone in the family has the same preferences.

In reality, the share of income controlled by the father or the mother does affect what the household consumes. When the mother controls a larger share of family income a number of studies, in the United Kingdom and in a wide variety of other countries, have found that the family tends to spend more on restaurant meals, child care, and women’s clothing, and less on alcohol and tobacco. As the mother controls a larger share of household resources, children’s health improves, too. These findings suggest that when providing assistance to poor families, in high-income countries and low-income countries alike, the monetary amount of assistance is not all that matters: it also matters which member of the family actually receives the money.

The budget constraint framework serves as a constant reminder to think about the full range of effects that can arise from changes in income or price, not just effects on the one product that might seem most immediately affected.

Key concepts and summary

The budget constraint framework suggest that when income or price changes, a range of responses are possible. When income rises, households will demand a higher quantity of normal goods, but a lower quantity of inferior goods. When the price of a good rises, households will typically demand less of that good—but whether they will demand a much lower quantity or only a slightly lower quantity will depend on personal preferences. Also, a higher price for one good can lead to more or less of the other good being demanded.

Problems

If a 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded of that product, will another 10% decrease in the price cause another 8% increase (no more and no less) in quantity demanded?

Got questions? Get instant answers now!

Questions & Answers

what is the condition of a consumer behaviour in the equilibrium under the theory of consumer behaviour
Sahr Reply
what is equilibrium
Sahr
A point where quantity demand & supply meets called equilibrium
Hasham
a state is said to be equilibrium when there is no tendency of movement.
Nibedita
Pls @Nibedita am confused
Prince
The state of balance achieved by an end user of products that refers to the amount of goods and services they can purchase given their present level of income and the current level of prices. Consumer equilibrium allows a consumer to obtain the most satisfaction possible from their income.
Okwori
where is the calculations?
Nathan Reply
what are the two conditions for aconsumer to be in the equilibrium under the theory of consumer behaviour in
Sahr
Economic equilibrium is a condition or state in which economic forces are balanced. In effect, economic variables remain unchanged from their equilibrium values in the absence of external influences. Economic equilibrium may also be defined as the point at which supply equals demand for a product,
vinay
Hello there, let's make a time to chat about econimics and its issues.
DA Reply
it's true
Adamsvictor
hie Sir /Madam l need help when it comes to Economics lm doing it for the first time
Thembelani
So, share your problems that you have in terms of economis and we will discuss on it.
DA
Basic Economic problems
Thembelani
what is the Basic Economic problem
Thembelani
what is the Basic Economic problem
Thembelani Reply
scarcity
Rhaiymornd
a bit of explanation please its my first year doing Economics
Thembelani
rare, limited. economic agents eg You dube, the govt & the business entities wants to maximise their utility/satisfaction but because limited resource or scarcity of such resources they are unable to satisfy their needs.
ian
thank u Sir , l understand what you are saying now
Thembelani
limited resources; you wanna take the most benefits from the minimum resource.
DA
if u ar a fresher, eco has to 2 fundamental parts "micro & macro". micro(small) this is were the economc agents ar discussd, economc systms, dmand & supply, typs of market systms etc and the macro (big) part the elucidates the functns of central bank, typs of employmnt, functns of money & int trade.
ian
there is an old adage that says "a picture is worth a thousand words" economics is full of graphing so it requires on the side of the student to master the art of keeping information in form graphs.
ian
oky Sir
Thembelani
scarcity becomes the fundamental problem of economics because of limited resources, when we take an individual, he or she has many wants, thus unlimited wants but can never satisfy all but only few.
Rhaiymornd
now when we take a firm, a firm maybe willing to produce two or more product into the market but due to limited resources they only produce one. the same way if we take the government, he or she maybe willing to bring development either through infrastructures,
Rhaiymornd
that is when consumer decision making rule comes in
Olusegun
choice arises as a result of scarcity of resources
Olusegun
so if we look through, the individual, firm and government, their wants are unlimited but due limited resources, all of their wants cannot be satisfy. therefore scarcity can be term as limited in supply of resources. scarcity is not lack of resources but insufficient resources
Rhaiymornd
there is a marriage with the following; scarcity, factors of production, opportunity cost curve (occ) or (ppc, ppf, tc) production possibility curve productn possibility frontier transformation curve. The OCC, PPC, PPF & TC explains the decisions made by householders, firms & the govt.
ian
opportunity cost also arises as a result of firm willing to produce a particular commodity but resources use in satisfying or producing such output is limited
Olusegun
wat ar those decisions? the most important is WHY nations economise tht is if they hav abundancy of factors of productn eg land, labour & entreprise? now since all of us have unlimited needs against few resourcs PPC, PPF, TC, OCC walks in to make wise allocatn of resources.
ian
how do those decisions made? eg by economic agents; a. Household (You) - if u have R10 & wish to buy a book & a pen & realise that both commodities seĺl at the same price which of the two (2) can u buy (necesity) and which one can u forgo (not all tht important).
ian
b. firms - they allocat mo resourcs to all thoz commoditz tht they think will yield mo profit. c. Govt - if the govt SA was to come in yo area which 1 would u think they can consider first tht can benefit the majority & the minority. So instead of building football stadium they construct a hospital.
ian
if the SA govt had enough resources they would have built both the stadium and the hospital but because of scarce in terms of resources they had to forgo the construction the stadium to build a hospital which is necessary for the majority to benefit.
ian
Opportunity cost well broken down..
Andres
opportunity cost means the lose of other alternatives when the alternative is chosen
saad Reply
is the benefits that you loose by not selecting a certain alternative.
EDWINY
individual wants maybe unlimited, but means to satisfy them are limited there one has to forgo some alternative in order to acquire other alternative and it must according priority, that is when scale of preference set in for individuals to make choice
Rhaiymornd
hello everyone
Aliyu
Next best alternative forgiven
Shoaib
demand is the amount of goods and services that consumer is willing and able to purchase at a particular prices over given period of time
Rhaiymornd Reply
yep
Abraham
what's demand?
labi Reply
What customers want the most...
Abraham
not only what customers wants, want is just mere desire but demand is backed by purchasing power, ability and willingness
Rhaiymornd
thanks
Abraham
What's opportunity cost?
Abraham
what are the differences between demand and supply
Zakariyah Reply
who is called lender of the last resort
Divyanshu Reply
Hi
Linda
hlw
Karishma
Central bank
Majeed
hy
Karishma
Hello
Majeed
hy
Karishma
How are you
Majeed
Am gud
Linda
fine
Karishma
Am gud
Linda
hello
Chandra
Well! what's going on
Majeed
r u study in economics
Karishma
anybody there?
Chandra
r u study in economics
Karishma
the central bank
Sessay
Has completed already
Majeed
hey
neha
yes
Abigail
Yesss
Majeed
ok
Karishma
hey
Doctor
yh
Abigail
more questions
Sessay
how ar you
Doctor
split the price effect into income effect and substitution effect
Karishma
fine and u
Abigail
Hi
Godwin
hi
Hey, I am new here. Hope, discussion on Economics will clear our concepts more.
yasir
yes
Abigail
do u speak hindi or english
Karishma
how to consumer equlibrium through ic
Karishma
consumer equilibrium demand equals supply
Kenneth
the consumer is in equilibrium when the indifference curve is tangential to the budget line. or when the BL and IC intersect
Sessay
reasons indifference curve slopes downwards?
Kenneth
fine Abby any good,
Doctor
ur lost
Doctor
hey. im new year. economics teacher how we can discuss some thing interesting.
EDWINY
which one
Doctor
what do u understand the concept of poverty cycle.
EDWINY
hey
Ebong
I'm New here
Ebong
hi
ian
just new here guy's and also an Economics fresher of Kogi State University Anyigba
nelson
wxup
Ayegba
who can tell the laboratory of economic?
Amara
, Dennis Weissman Associates, LLC Laboratory Economics is the monthly business newsletter that gets behind the headlines and press releases.
Ayegba
sooo teah me what an LLC
Emmanuel
what's the topic
Adamsvictor Reply
economic systems
gracious
hello
Antonio
market
aba
hello where can I find the diagrams
Manu
Hello I am totally out ,I am not understanding why we are here. can someone help me out?
Amara
why Economic is not a pure science can someone help me out
Mohamed
because economics like science put forth a some hypotheses and then do experiments to prove them
Anwesh
but these experiments are not completely controlled
Anwesh
Hello
Comfort
hey
suraj
hi people can you help me out on "demand and supply"
Milton
Am not understanding can someone enlighten me pls
Bertilla
hi people can you help me out on "demand and supply"
Sessay
hello. if Mr.Patrick's income is #900.00 while that of Mr.Shodawe is #1300.00 if Mr.Patrick and Shodowe pay #90.00 and #130.00 as taxes,the tax system is?
Benjamin
I need the answer please
Benjamin
regressive tax system
shaikh
OK thanks
Benjamin
Isn't this called proportional tax rate because the rate stays the same - 10%? Tell me if I'm wrong
Ioan
Supply is perfectly elastic and demand increases.
kishore Reply
whose there
Waseem
show the demand curve
Hameed Reply
it slopes downward from left to right
Ama
how resources are allocated in a free economy
Charlotte Reply
explain how discriminating Monopoly increase profits
Charlotte
factors responsible for the emergence of monopoly situation
adelakun Reply
total output produced by a country over a given period of time .... can someone give me the term plz
TMM Reply
GDP
Anjorin
thaks man
TMM
Woman. 👍👍
Anjorin
gross domestic products
janet
GDP
Bertilla
GDP
Prof
GDP
Bertilla
gross domestic product
gross domestic product
GDp
Mohamed
gdp
agboola
what is recession pertaining to GDP
Prince
what is recession pertaining to GDP
Prince
what is recession
Prince
law of demand and supply
Zakariyah
All thing been equal
Temple
no i think recession is pertaining to GNP
owolabi
gross national production
Abraham
what is embago
Peter
all things being equal
Raphael
embargo restriction on trade by government of a country
owolabi
an official ban on trade or other commercial activity with a particular country.
Ayegba
Embargo.....an order by a common carrier or publ regulatory agency prohibiting or restric freight transportation
Ayegba
it's a complete band on important n export
Bertilla
who is Really Good in Mathematics. put me Through. Let Do Group Reading; am Preparing to Write Jamb this Year.
Andrew
Hi. C+I+G+x-m
Shoaib
Gdp aggregate demand are bit same
Shoaib
Dpd = c+i+g+(x-m) is aggregate demand
Shoaib
Gdp=c+i+g+(x-m) is aggregate demand
Shoaib
GDP= c+i+s+g+(x-m)
Saboor
Topic ended waiting for next topic
Shoaib
What is Terms of Trade (TOT)?
DADA
At what point a Terms of Trade can be favorable?
DADA
Define Expansion path
Girma
The difference between cyclical unemployment and structural unemployment
Prince Reply

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask