Starting Point: Teaching and Learning Economics > Teaching Methods > Context-Rich Problems > Examples > Changes in Demand: Context Rich Problem

# Changes in Demand: Context Rich Problem

This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

#### Summary

In this context rich problem, students must be able to identify between the difference shifts in demand and subsequent reactions to that shift in demand. Students are asked to explain a headline from the newspaper to their mother.

## Learning Goals

Students will be able to use demand/supply analysis to determine the outcome from a change in tastes and preferences.

## Context for Use

Principles of Microeconomics. This problem can be used as an in-class group activity, homework assignment, or exam question. Students should already know the factors of demand, the effects of a shift in demand on equilibrium Q and equilibrium P and how to show these changes graphically. This assignment is relatively easy and illustrates the mistake often made when shifting curves.

## Description and Teaching Materials

It's Friday night, and you are just about to leave your room to attend a party at another dorm. However, a copy of the New York Times catches your eye. More specifically, there's an article about champagne. The article describes a successful marketing campaign by the champagne industry that changes consumers' tastes for champagne. The article notes that "many executives felt giddy about the stratospheric champagne prices that resulted. But they also feared that such sharp price increases would cause demand to decline, which would then cause prices to plunge." Just as you finish the article, your mother calls. She has read the same article and knows that you are currently taking economics, but she has never taken any economics. She wants to know if the analysis of the situation by the executives reported in the article is actually correct. In two paragraphs, construct your response to your mom.

Champagne Demand Problem (Microsoft Word 24kB Apr7 09)

## Teaching Notes and Tips

Students will need to have learned the difference between demand and quantity demanded before working on this problem.

## Assessment

Students should recognize that a change in tastes and preferences will shift demand right and subsequently cause an increase in equilibrium price and quantity. The students must then analyze the second part of the quote which says that an increase in price will cause a decrease in demand. Students should note that changes in price of the good itself do not cause shifts in the demand curve. In addition, ceteris paribus, a change in demand will end the process and we would expect an increase in tastes to increase demand, ceteris paribus.