practice activities

1.1 Market, Demand and Supply

The Determinants of Demand

Introduction: The table below show the quantities of energy drinks demanded at a range of
prices. Study the table and answer the questions that follow.

Price ($) Quantity (‘000s)

10 1
9 2.5
8 4
7 5.5
6 7
5 8.5
4 10
3 11.5
2 13
1 14.5
0 16

Part 1 - the Law of Demand:

1. Define demand.
Demand is a schedule or curve showing the quantities of a good consumers are willing
and able to buy at a range of prices in a particular period of time.

2. Describe the relationship between the price of energy drinks and the quantity demanded
as shown in the table.
As the price of energy drinks falls, the quantity demanded increases.

3. What explains this relationship?

The income effect: As energy drinks get cheaper, consumers can buy more of the
good with a particular amount of money, and assuming it is a normal good, the
quantity demanded increases

The substitution effect: As energy drinks get cheaper, substitutes for energy drinks
(such as soda) appear more expensive so consumers will buy more of the now
cheaper alternative

4. Plot the data in the table on the graph below, with price on the vertical axis and quantity
on the horizontal axis.
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Price
1 Energy Drinks
0

D
0
4 8 1 1 2
2
Quanti 6 0
ty
5. Plot a point on the graph showing the quantity of energy drinks demanded at $5.
Illustrate each of the following and identify the change that could cause it to happen:

a. A movement upwards and to the left along the curve.

A movement up and to the left could be caused by an increase in the price of
energy drinks

b. A movement downwards and to the right along the curve.

A movement down and to the right could be caused by a decrease in the price
of energy drinks

Part 2 - the Determinants of Demand:

6. Assume that soda prices are falling. For most consumers, soda is a close substitute for
energy drinks. Explain how this will affect the quantities demanded at each of the prices
in the table above?
A fall in soda prices will lead some consumers to switch from energy drinks to sodas,
causing the quantities demanded at each price to decrease for energy drinks

7. Fill in the table below assuming the decrease in the price of soda caused a decrease
decrease in the quantity of energy drinks demanded of two units at each of the prices in
the original table:
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Price ($) Quantity (‘000s)

10 -1
9 0.5
8 2
7 3.5
6 5
5 6.5
4 8
3 9.5
2 11
1 12.5
0 14

8. Draw a new demand curve, showing the effect of the decrease in soda prices.

Price
1 Energy Drinks
0

D D
0 1
4 8 1 1 2
2
Quanti 6 0
ty
9. Besides a decrease in the price of a substitute good, identify one example of a change in
each of the following determinants of demand for energy drinks that could lead to a fall in
demand for energy drinks:

a. The price of a complementary good:

People often consume energy drinks with a donut. If donut prices increase,
people will buy fewer energy drinks (since they are sometimes consumed
together)
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b. The tastes of consumers:

It is shown that energy drinks cause anxiety and high blood pressure, so
people shift to healthier drink options, reducing demand for energy drinks.

c. Consumer expectations:
It is expected that a large energy drink manufacturer will begin lowering prices
next month, so people postpone their purchases today in anticipation of the
lower prices next month. Demand decreases today.

d. Size of the market:

Fewer teenagers and action sports enthusiasts live in the community over time,
causing demand for energy drinks to decrease.

10. Discuss four factors that could cause the demand for energy drinks to increase. Illustrate
an increase in demand in the graph you drew in number 8.
An increase in the price of soda, a successful advertising campaign by a large energy
drink company, the expectation of a future shortage, the incomes of consumers
increasing, and the number of teenagers living in the area would all cause demand for
energy drinks to rise.

11. Distinguish between an increase in demand and an increase in the quantity demanded
for energy drinks. Do these concepts mean the same thing? Why or why not?
No, they do not mean the same thing. Increases in demand occur when a change in a
factor besides the price causes consumers to want to buy more energy drinks at every
price. An increase in quantity demanded describes what happens when only the price
decreases. (the first describes a shift in demand, the second a movement along a
demand curve)