Demand for Champagne Activity

[steven_huang]

Demand for champagne

(context-rich problem)

Students must analyze a situation in which a newspaper article confuses movements along the demand curve with shifts in the curve.

• For larger classes, could be done with a sub-set of students as a demonstration for the rest of the class.

• Follow-up questions for a representative graph could be asked using clickers.

[steven_huang]

Demand for champagne

(context-rich problem)

Students must analyze a situation in which a newspaper article confuses movements along the demand curve with shifts in the curve.

• For larger classes, could be done with a sub-set of students as a demonstration for the rest of the class.

• Follow-up questions for a representative graph could be asked using clickers.

[Chriskinsler]

The newspaper article is correct. The economists are right to assume that a higher price in champagne would cause a decrease in demand, mainly because people are not always willing to pay a higher price for a good if they know that they can get it cheaper from somewhere else. However, this is not always true. As seen in the video lectures on Sapling, sometimes people ARE willing to pay more for a good or service, despite knowing that they can get it cheaper from somewhere else.

The perfect example of this was described in the Sapling videos. At a movie theatre, you are willing to pay higher prices for a soda because there are limited substitutes available. On a beach during a hot day, you might be willing to pay more for a soda because you are thirsty. Although an increase in champagne price is not necessarily desirable, if there are not any substitutes available for the champagne, those who want the champagne will have to be willing to pay more in order to access the product.

[jld4]

By: Jonathan Davis

     The situation described by the executives reported in the article is definitely plausible and consistent with what we have learned in this economics class so far. That is because an increase in the price of champagne would decrease the amount of champagne sold, which is a decrease in demand. Even though each bottle of champagne sold would earn more money, it still wouldn’t be able to make up for the fact that significantly less would be sold.

     If fewer enough of bottles of champagne are sold, the company would have to decrease the price of the bottles of champagne in order to decrease the damage and stay afloat. This could come in the form of an aggressive clearance sale for example. So yes, it is plausible that a sharp increase in the price bottles of champagne would cause a significant decrease in the bottles sold, enough to cause a loss of profit.