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Individual and
Market Demand
Topics to be Discussed
Individual Demand
Market Demand
Consumer Surplus
Chapter 4
Slide 2
Topics to be Discussed
Network Externalities
Chapter 4
Slide 3
Individual Demand
Price Changes
Using
Chapter 4
Slide 4
Assume:
I = $20
PC = $2
PF = $2, $1, $.50
10
U1
D
B
U3
Three separate
indifference curves
are tangent to
each budget line.
U2
12
20
Chapter 4
Food (units
per month)
Slide 5
Clothing
(units per
month)
Price-Consumption Curve
U1
D
B
U3
4
U2
12
20
Chapter 4
Food (units
per month)
Slide 6
$2.00
$1.00
Demand Curve
$.50
H
4
12
20
Chapter 4
Food (units
per month)
Slide 7
Individual Demand
The
The Individual
Individual Demand
Demand Curve
Curve
Chapter 4
Slide 8
Individual Demand
The
The Individual
Individual Demand
Demand Curve
Curve
Chapter 4
Slide 9
$2.00
$1.00
Demand Curve
$.50
H
4
12
20
Chapter 4
Food (units
per month)
Slide
Individual Demand
Income Changes
Using
Chapter 4
Slide
Assume: Pf = $1
Pc = $2
I = $10, $20, $30
U2
B
U1
10
16
Chapter 4
Income-Consumption
Curve
U3
An increase in income,
with the prices fixed,
causes consumers to alter
their choice of
market basket.
Food (units
per month)
Slide
An increase in income,
from $10 to $20 to $30,
with the prices fixed,
shifts the consumers
demand curve to the right.
$1.00
D3
D2
D1
10
16
Chapter 4
Food (units
per month)
Slide
Individual Demand
Income Changes
The
Chapter 4
Slide
Individual Demand
Income Changes
An
Simultaneously,
Chapter 4
Slide
Individual Demand
Normal
Normal Good
Good vs.
vs. Inferior
Inferior Good
Good
Income Changes
When
Slide
Individual Demand
Normal
Normal Good
Good vs.
vs. Inferior
Inferior Good
Good
Income Changes
When
Slide
An Inferior Good
Steak15
(units per
month)
Income-Consumption
Curve
C
10
Both hamburger
and steak behave
as a normal good,
between A and B...
U3
U2
A
U1
10
Chapter 4
20
but hamburger
becomes an inferior
good when the income
consumption curve
bends backward
between B and C.
Hamburger
30 (units per month)
Slide
Individual Demand
Engel Curves
Engel
If
If
Chapter 4
Slide
Engel Curves
Income
($ per
month) 30
20
10
Chapter 4
12
16
Food (units
per month)
Slide
Engel Curves
Income
($ per
month) 30
Inferior
Engel curves slope
backward bending
for inferior goods.
20
Normal
10
Chapter 4
12
16
Food (units
per month)
Slide
Consumer Expenditures
in the United States
Income Group (1997 $)
Expenditure
($) on:
Entertainment
20,00029,000
700
947
1274
1514
2054
2654
4300
1725
2253
3243
4454
5793
9898
Rented Dwellings1957
2170
2371
2536
2137
1540
1266
Health Care
1031
1697
1918
1820
2052
2214
2642
Food
2656
3385
4109
4888
5429
6220
8279
859
978
1363
1772
1778
2614
3442
Clothing
Individual Demand
Substitutes
Substitutes and
and Complements
Complements
Slide
Individual Demand
Substitutes
Substitutes and
and Complements
Complements
Slide
Individual Demand
Substitutes
Substitutes and
and Complements
Complements
Chapter 4
Slide
Individual Demand
If
Slide
Effect
Chapter 4
Slide
Effect
Chapter 4
Slide
Substitution Effect
The
When
Slide
Income Effect
The
When
Chapter 4
Slide
Income Effect
Even
Chapter 4
Slide
(units per
month) R
C1
C2
U2
Substitution
Effect
F1
Total Effect
U1
E
Chapter 4
F2
Income Effect
Food (units
per month)
Slide
A
B
U2
Substitution
Effect
F1
U1
E
Total Effect
Since food is an
inferior good, the
income effect is
negative. However,
the substitution effect
is larger than the
income effect.
F2
Food (units
per month)
Income Effect
Chapter 4
Slide
This
Chapter 4
Slide
Assume
Ped =
-0.5
Income
Price
= $9,000
of gasoline = $1
Chapter 4
Slide
After
Gasoline
Tax
U2
U3
U1
Chapter 4
Original Budget
Line
Gasoline Consumption
(gallons/year)
Slide
Market Demand
From
From Individual
Individual to
to Market
Market Demand
Demand
Chapter 4
Slide
Determining the
Market Demand Curve
1016
32
813
25
610
18
47
11
24
Chapter 4
Slide
Summing to Obtain a
Market Demand Curve
Price
4
3
Market Demand
2
1
0
DA
5
DB
10
DC
15
Chapter 4
20
25
30
Quantity
Slide
Market Demand
Slide
Market Demand
Elasticity of Demand
Recall: Price elasticity of demand
measures the percentage change in the
quantity demanded resulting from a
1-percent change in price.
Q/Q Q / P
EP
P/P
Q/P
Chapter 4
Slide
If Price Increases,
Expenditures:
If Price Decreases,
Expenditures:
Increase
Decrease
Are unchanged
Are unchanged
Decrease
Increase
Chapter 4
Slide
Market Demand
Chapter 4
Slide
Market Demand
Its
formula is:
EP (P/Q)(1/slope)
Chapter 4
Slide
Market Demand
The
Chapter 4
Slide
Market Demand
Point
Point Elasticity
Elasticity of
of Demand
Demand (An
(An Example)
Example)
Assume
Price
Percent
Percent
Chapter 4
Slide
Market Demand
Point
Point Elasticity
Elasticity of
of Demand
Demand (An
(An Example)
Example)
Elasticity equals:
-33.33/.25 = -1.33 or -.50/.20 = -2.54
Chapter 4
Slide
Market Demand
Its
formula is:
EP ( Q/P)( P / Q)
P the average price
Q the average quantity
Chapter 4
Slide
Market Demand
EP ( Q/P)( P / Q)
P 8, P 10, Q 6, Q 4
P 18 / 2 9 & Q 10 / 2 5
E (2 / $2)($9 / 5) 1.8
1
Chapter 4
Slide
An Example:
The Aggregate Demand For Wheat
Chapter 4
Slide
= 1700 - 107P
= 1544 - 176P
Chapter 4
Slide
Chapter 4
Slide
20
18
16
14
12
10
8
Total Demand
6
4
Export
Demand
2
0
1000
Domestic
Demand
2000
Chapter 4
3000
Wheat(million bushels/yr.)
4000
Slide
Consumer Surplus
Consumer Surplus
The
Chapter 4
Slide
Consumer Surplus
Price
($ per
ticket)
20
19
18
17
16
Consumer Surplus
6 + 5 + 4 + 3 + 2 + 1 =
15
14
21
Market Price
13
Chapter 4
Slide
Consumer Surplus
Chapter 4
Slide
Consumer Surplus
Price
($ per
ticket)
Consumer Surplus
for the Market Demand
20
19
18
17
16
15
14
Consumer
Surplus
Market Price
13
Demand Curve
Actual
Expenditure
Chapter 4
Slide
Consumer Surplus
Slide
An Example:
Slide
Chapter 4
Slide
2000
1000
Chapter 4
10
NOX (pphm)
Pollution Reduction
Slide
Network Externalities
Chapter 4
Slide
Network Externalities
Chapter 4
Slide
Network Externalities
Chapter 4
Slide
Network Externalities
This
Chapter 4
Slide
Positive Network
Externality: Bandwagon Effect
Price
($ per
unit)
D20
20
40
D100
60
Chapter 4
80
100
Quantity
(thousands per month)
Slide
Positive Network
Externality: Bandwagon Effect
Price
($ per
unit)
D20
D100
Demand
20
40
60
Chapter 4
80
100
Quantity
(thousands per month)
Slide
Positive Network
Externality: Bandwagon Effect
Price
($ per
unit)
D20
D100
$30
Demand
$20
Pure Price
Effect
20
40
48 60
Chapter 4
80
100
Quantity
(thousands per month)
Slide
Positive Network
Externality: Bandwagon Effect
Price
($ per
unit)
D20
D100
$30
Demand
$20
Pure Price
Effect
Bandwagon
Effect
20
40 48 60
Chapter 4
80
100
Quantity
(thousands per month)
Slide
Network Externalities
Slide
Negative Network
Externality: Snob Effect
Price
($ per
unit)
Demand
$30,000
$15,000
D2
D4
D8
2
Pure
Price Effect
Chapter
4
D6
14
Quantity
(thousands
per month)
Slide
Negative Network
Externality: Snob Effect
Price
($ per
unit)
Demand
$30,000
Net Effect
Snob Effect
$15,000
D2
D4
D8
2
Pure
Price Effect
Chapter
4
D6
14
Quantity
(thousands
per month)
Slide
Windows PC operating
system
Fax-machines
and e-mail
Chapter 4
Slide
Chapter 4
Slide
Problem
Consumers
Chapter 4
Slide
Chapter 4
Slide
Least-squares
regression is one
approach.
Chapter 4
Slide
4
7
8
13
16
15
19
20
22
Price (P)
24
20
17
17
10
15
12
9
5
Chapter 4
Income(I)
10
10
10
17
17
17
20
20
20
Slide
= a - bP
= 28.2 -1.00P
Chapter 4
Slide
Estimating Demand
Price
25
D represents demand
if only P determines
demand and then from
the data: Q=28.2-1.00P
20
15
d1
10
d2
D
d3
10
15
Chapter 4
20
25 Quantity
Slide
Estimating Demand
Adjusting for changes in income
Price
25
20
15
d1
10
d2
D
d3
10
15
Chapter 4
20
25 Quantity
Slide
Elasticity: E P (Q / P )( P / Q ) b( P / Q)
Chapter 4
Slide
isoelastic demand =
Slide
Income
elasticity = 1.46
Chapter 4
Slide
Substitutes: b2 is positive
Complements: b2 is negative
Chapter 4
Slide
Chapter 4
Slide
Answer
Estimated
log(QGN ) 1.998a 2.085 log( PGN ) 0.62 log( I ) .014 log( PSW )
Slide
Summary
Slide
Summary
Chapter 4
Slide
Summary
Chapter 4
Slide
Summary
Slide
Summary
Chapter 4
Slide
End of Chapter 4
Individual and
Market Demand