Question

Let's assume that each person in the United States consumes an average of 37 gallons of soft drinks (nondiet) at an average price of \(\$ 2\) per gallon and that the U.S. population is 294 million. At a price of \(\$ 1.50\) per gallon, each individual consumer would demand 50 gallons of soft drinks. From this information about the individual demand schedule, calculate the market demand schedule for soft drinks for the prices of \(\$ 1.50\) and \(\$ 2\) per gallon.

Short answer

Answer: At the price of \(\$1.50\) per gallon, the quantity demanded is 14,700,000,000 gallons. At the price of \(\$2\) per gallon, the quantity demanded is 10,878,000,000 gallons.

Step-by-step solution

Calculate the total amount of soft drinks consumed by each person at the price of \(\$2\) per gallon

According to the problem, each person consumes an average of 37 gallons of soft drinks at a price of \(\$2\) per gallon.

Calculate the total consumption of soft drinks by the entire population at the price of \(\$2\) per gallon

Since there are 294 million people in the United States, the total consumption of soft drinks at a price of \(\$2\) per gallon can be calculated by multiplying the average consumption per person by the population. Total consumption at \(\$2\) = (Average consumption at \(\$2\) per person) × (Population) Total consumption at \(\$2\) = (37 gallons) × (294,000,000) Total consumption at \(\$2\) = 10,878,000,000 gallons

Calculate the total amount of soft drinks consumed by each person at the price of \(\$1.50\) per gallon

The problem states that each individual consumer would demand 50 gallons of soft drinks when the price is \(\$1.50\) per gallon.

Calculate the total consumption of soft drinks by the entire population at the price of \(\$1.50\) per gallon

Similarly, we'll multiply the average consumption per person at the \(\$1.50\) price point by the population. Total consumption at \(\$1.50\) = (Average consumption at \(\$1.50\) per person) × (Population) Total consumption at \(\$1.50\) = (50 gallons) × (294,000,000) Total consumption at \(\$1.50\) = 14,700,000,000 gallons

Create the market demand schedule

Now we can create the market demand schedule by listing the quantities demanded at each price. Market Demand Schedule: | Price per Gallon | Quantity Demanded (Gallons) | |------------------|-------------------------------| | \(\$2\) | 10,878,000,000 | | \(\$1.50\) | 14,700,000,000 |

Key concepts

Understanding the Individual Demand Schedule

To grasp the concept of an individual demand schedule, think of it as a roadmap that shows the quantity of a good a person is willing to buy at various prices. In our example, we're looking at the consumption of soft drinks.
At a price of \( \\(2 \) per gallon, each person consumes 37 gallons on average. If the price drops to \( \\)1.50 \) per gallon, the individual demand increases to 50 gallons.
This illustrates how people typically consume more of a product when prices are lower. The individual demand schedule is an essential tool for businesses and economists because:

• It helps predict consumer purchasing behavior at different price points.
• It aids in estimating how changes in price can affect overall sales for a single consumer.

Understanding this schedule on an individual level is the first step toward pinning down broader market demand.

Diving Into Price Elasticity of Demand

Price elasticity of demand measures how sensitive the quantity demanded of a good is to a change in price. It is a core concept that helps in understanding consumer behavior in response to price fluctuations.
In simple terms, if a small change in price leads to a large change in the quantity demanded, we say the demand is elastic. Conversely, if the quantity demanded changes very little with a price change, demand is inelastic.
For our soft drink scenario:

• When the price drops from \( \\(2 \) to \( \\)1.50 \), each individual's consumption increases from 37 gallons to 50 gallons.
• This change demonstrates that the demand for soft drinks might be relatively elastic since a drop in price results in significantly higher consumption.

Price elasticity helps companies decide how to price their products and forecast how pricing adjustments can impact overall demand.

Exploring Consumer Behavior

Consumer behavior looks at the decisions individuals make regarding the purchase of goods and services. It's influenced by factors like preferences, income, price changes, and the availability of substitutes.
In the exercise, the change in consumption of soft drinks when the price changes reflects consumer behavior.
Several key insights can be drawn about consumer behavior in this context:

• Consumers tend to buy more when prices drop, demonstrating price-dependent purchasing behavior.
• The increase from 37 to 50 gallons indicates soft drinks are highly desirable at a lower price.
• External factors such as advertising, seasonal demand, or changes in consumer income could also impact demand.

By analyzing consumer behavior, businesses can tailor marketing strategies and adjust pricing to better meet their customer's needs and maximize sales.