Question

Demand twisters: Sketch and explain the demand relationship in each of the following statements. a. I would never buy a Miley Cyrus album! You couldn't even give me one for nothing. b. I generally buy a bit more coffee as the price falls. But once the price falls to \(\$ 2\) per pound, I'll buy out the entire stock of the supermarket. c. I spend more on orange juice even as the price rises. (Does this mean that I must be violating the law of demand?) d. Due to a tuition rise, most students at a college find themselves with less disposable income. Almost all of them eat more frequently at the school cafeteria and less often at restaurants, even though prices at the cafeteria have risen, too. (This one requires that you draw both the demand and the supply curves for school cafeteria meals.)

Short answer

A: Vertical demand curve at quantity of zero. B: Downward-sloping demand curve becoming perfectly elastic at $2. C: The demand curve is upward sloping, which could suggest a Giffen or Veblen good. D: Two graphs needed: one showing a rightward shift in the demand curve and another showing the new equilibrium with the original supply curve.

Step-by-step solution

Analyze the Demand Relationship in Statement A

For statement A, the demand relationship is such that the individual has zero demand for the product at any price, meaning that the demand curve would be a vertical line along the y-axis at a quantity of zero.

Sketch and Explain the Demand Relationship in Statement B

For statement B, the demand curve is downward-sloping reflecting an increase in quantity demanded as price falls, which is typical in most demand curves. However, once the price hits \(2 per pound, the individual's demand becomes perfectly elastic indicated by a horizontal line at the \)2 price level since they are willing to purchase an infinite quantity.

Interpret the Demand Relationship in Statement C

Statement C describes a situation where the individual's quantity demanded for orange juice increases even as its price increases, suggests a positive slope or upward sloping demand curve. This could be due to orange juice being a Giffen or Veblen good for the individual, where consumption is a status symbol or they have no substitutes.

Draft Demand and Supply for the School Cafeteria as per Statement D

In statement D, students are consuming more at the school cafeteria despite a price rise due to decreased disposable income which suggests a shift in demand curve to the right. To show this, you need two graphs: one depicting the increase in demand with a new demand curve shifted to the right, and another with the original supply curve to show the new equilibrium price and quantity.

Key concepts

Demand Curve

The demand curve graphically represents the relationship between the price of a good and the quantity demanded by consumers at various price levels. Generally, the demand curve slopes downwards from left to right, which shows that as the price decreases, the quantity demanded increases, and vice versa. This relationship was exemplified by statement B in the exercise, where the consumer showed an increased willingness to buy more coffee as the price dropped.

However, the demand curve can take different shapes. For instance, a perfectly inelastic demand curve is vertical, indicating no change in quantity demanded regardless of the price change, similar to statement A regarding the Miley Cyrus album. Conversely, a perfectly elastic demand, seen in the latter part of statement B, is represented by a horizontal line, indicating that any price above the threshold will lead to zero demand, while at that price level, the quantity demanded is theoretically infinite.

Law of Demand

The law of demand is a fundamental economic principle stating that, ceteris paribus (all other factors being equal), as the price of a product decreases, the quantity demanded will generally increase, and as the price increases, the quantity demanded will generally decrease. This principle suggests a negative or inverse relationship between price and quantity demanded, evident in most market scenarios.

The exercise statement B illustrates this concept until a certain price point is reached. This standard behavior breaks in the case of certain non-typical goods or situations, like the ones described in statements C and D. Statement C described a consumer buying more orange juice as the price rose, potentially violating the law of demand, which suggests exploring other factors such as Giffen or Veblen goods, or the consumer's preferences.

Elastic and Inelastic Demand

Demand elasticity measures how sensitive the quantity demanded of a good is to its price. If demand changes significantly when the price changes, it is considered elastic. Conversely, if demand barely changes with the price, it is deemed inelastic. Goods necessary for survival tend to have inelastic demand because consumers will buy them regardless of price changes, while non-essential luxury goods are often more elastic.

In the textbook exercise, we see an example of perfectly elastic demand when the consumer is ready to buy the entire stock of coffee at a specific price. This is not typical for most products and represents an extreme scenario. Most goods have a degree of elasticity that's somewhere between perfectly elastic and perfectly inelastic. These concepts can help businesses set prices and predict how consumers will respond to price changes.

Giffen and Veblen Goods

Giffen and Veblen goods are unique exceptions to the law of demand. Giffen goods are typically inferior products that defy normal economic logic, where demand increases as the price increases because the goods act as staple necessities without close substitutes. Veblen goods are the opposite in nature; they are luxury items where higher prices actually increase their desirability, as they are seen as status symbols.

Statement C from the exercise could be hinting towards orange juice being a Giffen or Veblen good for the consumer, as their demand for it increases with the price, contrary to the typical demand behavior. Such goods are rare and serve as interesting case studies in economic theory.

Shift in Demand Curve

A shift in the demand curve implies a change in demand at every price level due to factors other than the price of the good itself. These factors include changes in consumer income, preferences, prices of substitutes or complements, and expectations of future prices. An outward/rightward shift indicates an increase in demand, while an inward/leftward shift indicates a decrease.

In statement D, the shift to the right in the demand curve for school cafeteria meals was likely caused by a decrease in students' disposable income due to higher tuition fees – a non-price determinant of demand. This example showcases that the demand curve does not only move along with changes in price but can also shift entirely based on external conditions.