<< 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 marginal rate of transformation
Peter Reply
difference between individual demand and market demand with illustrations.
kwagala Reply
what is market demand
kwagala
Is the total amount of goods and services that all consumers are willing and able to purchase...
Istar
market demad business
zahid
What is the different between demand and supply?
Mohamud Reply
Demand is a natural phenomenon by a person who wants a certain commodity , u can say The ablity to buy a certain commodity at a certain price is called demand
Wardan
supply is point of view from Supplier of certain commodity
Wardan
Thnks wardan sheikh
Mohamud
u can get help from Law of Demand which is When a price of certain commodity increases it's quantity demanded decreases and when the price of certain commodity decreases it's quantity demanded increases and vice versa
Wardan
and to understand supply u can understand by the help of law of supply which is when a price of certain commodity increases it's quantity supplies also increases and when price of certain commodity decreases it's quantity supplies also decreases and vice versa
Wardan
Hope u got the answer
Wardan
hi
Christian
hello
Victory
what is point?
Asmatullah
pls it's quantity supplied not quantity supplies. tanx
PETER
Peter it's just typing error if u know better u should take initiatives and start helping people or u can just shut up
Wardan
What is the labour market?
Ruchi
Ruchi Shukla it's a big topic which contains several parts , u can understand a market where there are number of employees (skilled and semiskilled )
Wardan
describe the economic systems
kivumbi
ryt nice
Destiny
what is the cause of a country's population
Destiny
Destiny Abekah the cause Is fun ahahahaha
Wardan
Hi
Crahmaan
What is going here?
Crahmaan
Hi
Jacob
what is naxion shoks any 1 can explain please
Iftikhar
hello
Hydrammeh
impact of transport and communication for economic help me
Jacob
What is the formula for calculating elasticity
Destiny Reply
Change in Quantity/Change in price
Abdul
ok
Destiny
E=%∆ in Q/ %∆ in P
ashafa
what mean elasticity
Jimcaale
change in quantity divided by change in price
mukhtaar
ok
Abdul
price elasticity = Q2-Q1/Q2+Q1/2/ P2-P1/P2+P1/2
Wardan
second formula is change in q / change in p × Q(original)/ p (original)
Wardan
Elasticity is just a measurement of change influenced by change in price , income
Wardan
change quantity /change in price
Ayaan
ok
Muhammad
change in price change in quality
Muhammad
yes
Thomas
public economy vs public choice
martha Reply
cool n you
Godwin
nice
Saratu
thank God
Destiny
so wat is going on
Destiny
please understand change in demand.
Saratu
learning is going on please.
Saratu
demand changes when the price of the commodies in the market increaaes
Destiny
amd vise veser
Destiny
thank you.
Saratu
same to u
Destiny
I need help with PED and PES
XORO Reply
Price elasticity demand
Saratu
price elasticity supply
Saratu
What are the uses of stastitics in economic and business?
Mohamud Reply
Statistics helps in analysing various economic problems such as inflation, unemployment etc by looking at numbers, trends over the years.
Samuel
it also helps in summarising mass data like income, consumption etc into measures like per capita income and per capita consumptions which are more explanatory of how an economy is performing.
Samuel
Statistics is a data interpretation tool used for collecting, classifying and analyzing data. It is an indispensable tool for an economist to understand various business and economic problems and formulate policies to tackle with them.
Samuel
good answer
Destiny
how is the firm know elasticity
Shekwonudiza Reply
What is margin?
Crahmaan
wanna know about GDP ?
Wardan Reply
yes
Leela
i would like to know about GST rather
JNUI
i've gone through many articles related to GST. but my question is, earlier, when the amount of tax was so higher, who was the winner?
JNUI
and if the amount of tax is less, then somebody must be losing some money. so who is the loss maker
JNUI
also, what I don't understand properly is the 'input tax credit'. 🤔 and the e-way bill
JNUI
Gst is an essential Tax to boost up National income
Wardan
Gst isn't ever goes too high but in cases where there is a larger expectations on Sales revenue the gst increase and vice versa
Wardan
and yes it's the only time to make revenue for Central Government under some period and certain conditions u will learn
Wardan
yeah third one the Gst is low
Wardan
the central Government is responsible for such error to not be so prudent under those policies which are applied
Wardan
deductive and inductive
Mianosama
deductive and inductive are the parts of micro economics
Wardan
What are the key elements to consider when defining economics
Samuel
scarcity, means and end
Balogun
Samuel it is defined as study of house hold Management and money matters .
Wardan
scarcity is defined as the point where demand is greater than supply
Wardan
Use scarcity,means and end in your definition
Samuel
I really love this group
Samuel
Am new to economics and you guys are making it so interesting to study
Samuel
yup seems very interesting
Criminologist
Hahaha thanks buddy
Wardan
consider a market (where there are buyers and sellers ) situation , Let's make it funny to make u understand more easy that due to some political issues It is announced by the government that every store will be closed tomorrow , the citizens who are intelligent enough to predict consequences for it
Wardan
They will start buying more and more and due to those political issue some stores were closed and few were opened so at this point the demand for product or commodity (which people are willing to buy from stores) is greater than supply
Wardan
What is GDP
XORO
basic competitive model and the role of mechanism
SRIPRIYA Reply
explain the Adam Smith law of economics
Daya Reply
critical use of tariffs and non tariffs on imports and exports.
Natukunda Reply
Is harmful
amin
is good I guess
Audrey
it's very good
Godwin
why is the marginal curve u shaped
jake Reply
which of marginal curve?
begyere
marginal cost curve
jake
critical use of tariffs and non tariffs on exports and imports
Natukunda
what is the features of monopoly market? how it is different from monopolistic market?
alisha Reply
Monpoly market is a merket where the are many buyers, but only one seller. Because of the product is unique, and price discremination will be there.
Crahmaan
so how is it different from monopolistic market as she is saying
Samuel
or it is the same thing
Samuel
it marvellous
Amadu
thanks
Samuel
what is demand function
uju Reply
demand function is the mathematical representation of price and quantity demanded of goods and services at various prices at a given time .
King
Demand function is an equation which shows the mathematical relationship between the quantity demanded of a good and the values of the various determinants of demand.
Bon

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