Extending comprehension competency focus

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Answering WHY questions: Speak up your mind.

1. Why is the principle of voluntary exchange considered to be the basis of activity in a market economy?

2. Why is there an inverse relationship between quantity demanded and the price?

3. Why is substitution effect one of the factors explaining the inverse relation between price and quantity demanded?

4. Why can’t even the wealthiest person in the world buy everything he wants?

5. Why does additional satisfaction decline with additional consumption?

Critical thinking (Discussion competency): Discuss the following questions in groups/pairs.

1. If the price of heating and cooling homes increased and consumers’ income stayed the same, how would consumers’ behavior change?

2. Keeping the law of diminishing marginal utility in mind, would you predict an

increase or decrease in quantity demanded in the same market over time?

Explain.

Exploring issues: Think about what factors buyers and sellers consider during a voluntary exchange. Write a list of factors for each in the space provided.

Buyer____________________________________________________________

Seller____________________________________________________________

Solving problems and finding solutions:

1. What substitutes might people buy if the price of soda doubled?

2. Describe one strategy sellers use to offset diminishing marginal utility.

3. Suppose that the buyer doesn’t agree to the product or its price. Other than change the price, how can the seller convince the buyer to agree to the price?

Making comparisons: Compare three situations and say which one illustrates (a) real income effect, (b) substitution effect and (c) diminishing marginal utility.

1. You eat peanut butter and jelly sandwiches for lunch every day. One day, when the price of jelly went from $2.39 to $8.49 a jar, you decided to buy honey instead of jelly in order to keep the cost of your lunch the same.

2. At an amusement park, you wanted to ride the roller coaster more than once. With each additional ride on the roller coaster, you had more fun. However, each additional ride was a little less fun than the previous ride.

3. A consumer chose not to go to the movies because the price of groceries increased. Groceries were a necessity. Going to the movies was a luxury.

Making predictions: Imagine that you sell popcorn at the local football stadium. Knowing about the diminishing marginal utility, how would you price your popcorn after half-time?

Classifying: Discuss the reasons for the choices you made during your most recent purchases. Did the reasons come under the real income effect, the substitution effect or the law of diminishing marginal utility?

Reviewing: Watch video “The Law of Demand”. Have you learnt anything new about the relationship between price and quantity demanded? Answer the following questions:

1. What examples of market are given in the video?

2. How is demand defined in the video?

3. How is the demand curve plotted?

4. Why does the demand curve have a downward slope?

Applying information: The law of demand holds that other things equal, as the price of a good or service rises, its quantity demanded falls. The reverse is also true: as the price of a good or service falls, its quantity demanded increases. This law is a simple, common sense principle.

A demand curve is a graphical depiction of the law of demand. We plot price on the vertical axis and quantity demanded on the horizontal axis. As the figure illustrates, the demand curve has a negative slope, consistent with the law of demand.

Study the graph and say how many videos the consumer rents

a) if the rental price is $5,

b) if the price falls to $4,

c) if the price is only $3?

Prove that the demand curve plots the inverse relationship between price and quantity demanded.