Exercise: Demand Curves

Goal To create a graph of the classic price/demand model in order to understand assumptions and different interpretations of the model.

Materials
At least one laptop or tablet running a spreadsheet application for each group.
Individuals or groups of 2 or 3 students working on a single computer.
You will need basic knowledge of: spreadsheet calculations, sum, addition, multiplication, bracket rules, cell ranges, relative cell references, absolute cell references etc.

Up to one hour to complete depending on class size, i.e.
20-30" to create models.
10-20" to present and interpret.

Instructions
Open and save a spreadsheet: enter formulae, values and calculations to create a graph of the classic price/demand model.

a) Enter the following data in columns and generate line or scatter graphs:

1. An index, e.g. from 1 to 50.
2. A demand function for each person, uniformly distributed over the interval [0, 1] i.e.: 1, 0.98, 0.96, ..., 0.02, 0.0.

b) Add a unit demand function representing the classic 'three types of customer' model i.e. with value/demand/utility [1.0, 0.5, 0.02]; of the following ratios: Spend Thrifts 10% (v=1.0), Average Spenders 60% (v=0.5), Tight Wads 30% (v=.02).

c) Add a demand function representing where 'Everyone Values Equally ', i.e. v=1 for all.

Your models should look something like this:

3 different value/demand/utility models

Questions:
What do you think the models represent?
What does the 'index' represent?
What changes if you use an index from 1 to 100, 1 to 1,000,000?
What if you plotted values using a scatter chart rather than a line chart?
Why use the range 0-1 for utility/demand/value?
What does the idea of demand represent?
What does idea of value represent?
What does the idea of utility represent?
Is it reasonable to use the concepts interchangeably?
What does this model assume about the possible market of consumers or buyers?
Does this model represent actual consumers or buyers? What assumptions about buyers are being made?
Does this model describe both products and services?
Does this model describe both physical and digital goods?
What is a market?
How big is the market? What assumptions are you making?
What is the relationship between market price and demand?
How would you represent the relationship between price and demand? Is it realistic?
What price would the supplier like to set? What assumptions are you making?
What price would you recommend to the supplier to set? Why?
What changes if other suppliers enter the market?

Comments
May use MS Excel, Google docs spreadsheet, OpenOffice, Numbers.