(Individual and Market Demand (Chapter 4
اسلاید 1: Chapter 4Individual andMarket Demand
اسلاید 2: Chapter 4Slide 2Topics to be DiscussedIndividual DemandIncome and Substitution EffectsMarket DemandConsumer Surplus
اسلاید 3: Chapter 4Slide 3Topics to be DiscussedNetwork ExternalitiesEmpirical Estimation of Demand
اسلاید 4: Chapter 4Slide 4Individual DemandPrice ChangesUsing the figures developed in the previous chapter, the impact of a change in the price of food can be illustrated using indifference curves.
اسلاید 5: Chapter 4Slide 5Effect of a Price ChangeFood (units per month)Clothing(units permonth)456U2U3ABDU141220Three separateindifference curvesare tangent toeach budget line.Assume: I = $20PC = $2PF = $2, $1, $.5010
اسلاید 6: Chapter 4Slide 6Price-Consumption CurveEffect of a Price ChangeFood (units per month)Clothing(units permonth)456U2U3ABDU141220The price-consumptioncurve traces out theutility maximizingmarket basket for thevarious prices for food.
اسلاید 7: Chapter 4Slide 7Effect of a Price ChangeDemand CurveIndividual Demand relatesthe quantity of a good thata consumer will buy to theprice of that good.Food (units per month)Priceof FoodHEG$2.0041220$1.00$.50
اسلاید 8: Chapter 4Slide 8Individual DemandTwo Important Properties of Demand Curves1)The level of utility that can be attained changes as we move along the curve.The Individual Demand Curve
اسلاید 9: Chapter 4Slide 9Individual DemandTwo Important Properties of Demand Curves2)At every point on the demand curve, the consumer is maximizing utility by satisfying the condition that the MRS of food for clothing equals the ratio of the prices of food andclothing.The Individual Demand Curve
اسلاید 10: Chapter 4Slide 10Effect of a Price ChangeFood (units per month)Priceof FoodHEG$2.0041220$1.00$.50Demand CurveE: Pf/Pc = 2/2 = 1 = MRSG: Pf/Pc = 1/2 = .5 = MRSH:Pf/Pc = .5/2 = .25 = MRSWhen the price falls: Pf/Pc & MRS also fall
اسلاید 11: Chapter 4Slide 11Individual DemandIncome ChangesUsing the figures developed in the previous chapter, the impact of a change in the income can be illustrated using indifference curves.
اسلاید 12: Chapter 4Slide 12Effects of Income ChangesFood (units per month)Clothing(units permonth)An increase in income,with the prices fixed,causes consumers to altertheir choice ofmarket basket.Income-Consumption Curve34AU1510BU2D716U3Assume: Pf = $1 Pc = $2 I = $10, $20, $30
اسلاید 13: Chapter 4Slide 13Effects of Income ChangesFood (units per month)Priceof foodAn increase in income,from $10 to $20 to $30,with the prices fixed,shifts the consumer’sdemand curve to the right. $1.004D1E10D2G16D3H
اسلاید 14: Chapter 4Slide 14Individual DemandIncome ChangesThe income-consumption curve traces out the utility-maximizing combinations of food and clothing associated with every income level.
اسلاید 15: Chapter 4Slide 15Individual DemandIncome ChangesAn increase in income shifts the budget line to the right, increasing consumption along the income-consumption curve.Simultaneously, the increase in income shifts the demand curve to the right.
اسلاید 16: Chapter 4Slide 16Individual DemandIncome ChangesWhen the income-consumption curve has a positive slope:The quantity demanded increases with income.The income elasticity of demand is positive.The good is a normal good.Normal Good vs. Inferior Good
اسلاید 17: Chapter 4Slide 17Individual DemandIncome ChangesWhen the income-consumption curve has a negative slope:The quantity demanded decreases with income.The income elasticity of demand is negative.The good is an inferior good.Normal Good vs. Inferior Good
اسلاید 18: Chapter 4Slide 18An Inferior GoodHamburger (units per month)Steak(units permonth)1530U3CIncome-ConsumptionCurve…but hamburgerbecomes an inferiorgood when the incomeconsumption curvebends backward between B and C.10520510AU1BU2Both hamburgerand steak behaveas a normal good, between A and B...
اسلاید 19: Chapter 4Slide 19Individual DemandEngel CurvesEngel curves relate the quantity of good consumed to income.If the good is a normal good, the Engel curve is upward sloping.If the good is an inferior good, the Engel curve is downward sloping.
اسلاید 20: Chapter 4Slide 20Engel CurvesFood (unitsper month)30481210Income($ permonth)20160Engel curves slopeupward fornormal goods.
اسلاید 21: Chapter 4Slide 21Engel CurvesEngel curves slopebackward bending for inferior goods.InferiorNormalFood (unitsper month)30481210Income($ permonth)20160
اسلاید 22: Consumer Expenditures in the United StatesEntertainment70094712741514205426544300Owned Dwellings1116172522533243445457939898Rented Dwellings1957217023712536213715401266Health Care1031169719181820205222142642Food2656338541094888542962208279Clothing85997813631772177826143442ExpenditureLess than1,000-20,000-30,000-40,000-50,000-70,000-($) on:$10,00019,00029,00039,00049,00069,000and aboveIncome Group (1997 $)
اسلاید 23: Chapter 4Slide 23Individual Demand1) Two goods are considered substitutes if an increase (decrease) in the price of one leads to an increase (decrease) in the quantity demanded of the other.e.g. movie tickets and video rentalsSubstitutes and Complements
اسلاید 24: Chapter 4Slide 24Individual Demand2) Two goods are considered complements if an increase (decrease) in the price of one leads to a decrease (increase) in the quantity demanded of the other.e.g. gasoline and motor oilSubstitutes and Complements
اسلاید 25: Chapter 4Slide 25Individual Demand3) Two goods are independent when a change in the price of one good has no effect on the quantity demandedof the otherSubstitutes and Complements
اسلاید 26: Chapter 4Slide 26Individual DemandSubstitutes and ComplementsIf the price consumption curve is downward-sloping, the two goods are considered substitutes.If the price consumption curve is upward-sloping, the two goods are considered complements.They could be both!
اسلاید 27: Chapter 4Slide 27Income and Substitution EffectsA fall in the price of a good has two effects: Substitution & IncomeSubstitution EffectConsumers will tend to buy more of the good that has become relatively cheaper, and less of the good that is now relatively more expensive.
اسلاید 28: Chapter 4Slide 28Income and Substitution EffectsA fall in the price of a good has two effects: Substitution & IncomeIncome EffectConsumers experience an increase in real purchasing power when the price of one good falls.
اسلاید 29: Chapter 4Slide 29Income and Substitution EffectsSubstitution EffectThe substitution effect is the change in an item’s consumption associated with a change in the price of the item, with the level of utility held constant.When the price of an item declines, the substitution effect always leads to an increase in the quantity of the item demanded.
اسلاید 30: Chapter 4Slide 30Income and Substitution EffectsIncome EffectThe income effect is the change in an item’s consumption brought about by the increase in purchasing power, with the price of the item held constant.When a person’s income increases, the quantity demanded for the product may increase or decrease.
اسلاید 31: Chapter 4Slide 31Income and Substitution EffectsIncome EffectEven with inferior goods, the income effect is rarely large enough to outweigh the substitution effect.
اسلاید 32: Chapter 4Slide 32Income and Substitution Effects: Normal GoodFood (units per month)OClothing(units permonth)RF1SC1AU1The income effect, EF2, ( from D to B) keeps relativeprices constant but increases purchasing power.Income EffectC2F2TU2BWhen the price of food falls, consumption increases by F1F2 as the consumer moves from A to B.ETotal EffectSubstitutionEffectDThe substitution effect,F1E, (from point A to D), changes the relative prices but keeps real income(satisfaction) constant.
اسلاید 33: Chapter 4Slide 33Food (units per month)ORClothing(units permonth)F1SF2TAU1ESubstitutionEffectDTotal EffectSince food is an inferior good, theincome effect is negative. However,the substitution effectis larger than the income effect.BIncome EffectU2Income and Substitution Effects: Inferior Good
اسلاید 34: Chapter 4Slide 34Income and Substitution EffectsA Special Case--The Giffen GoodThe income effect may theoretically be large enough to cause the demand curve for a good to slope upward.This rarely occurs and is of little practical interest.
اسلاید 35: Chapter 4Slide 35Effect of a Gasoline Tax With a RebateAssumePed = -0.5Income = $9,000Price of gasoline = $1
اسلاید 36: Chapter 4Slide 36Effect of a Gasoline Tax With a RebateGasoline Consumption (gallons/year) ExpendituresOn OtherGoods ($)ACGasoline = 1200 gallonsOther expenditures = $7800U21200Original BudgetLineBDU1900AfterGasolineTaxE$.50 Excise TaxGasoline = 900 gallonsJFH913.5After Gasoline TaxPlus RebateU3$450 REBATENew budget lineConsumer is worse off
اسلاید 37: Chapter 4Slide 37Market DemandMarket Demand CurvesA curve that relates the quantity of a good that all consumers in a market buy to the price of that good.From Individual to Market Demand
اسلاید 38: Chapter 4Slide 38Determining the Market Demand Curve161016322481325326101840471150246PriceIndividual AIndividual BIndividual CMarket($)(units)(units)(units)(units)
اسلاید 39: Chapter 4Slide 39Summing to Obtain a Market Demand CurveQuantity 1234Price 0551015202530DBDCMarket DemandDAThe market demandcurve is obtained bysumming the consumer’s demand curves
اسلاید 40: Chapter 4Slide 40Market DemandTwo Important Points1)The market demand will shift to the right as more consumers enter the market.2) Factors that influence the demands of many consumers will also affect the market demand.
اسلاید 41: Chapter 4Slide 41Market DemandElasticity of DemandRecall: Price elasticity of demand measures the percentage change in the quantity demanded resulting from a 1-percent change in price.
اسلاید 42: Chapter 4Slide 42Price Elasticity and Consumer ExpenditureDemandIf Price Increases,If Price Decreases,Expenditures:Expenditures:Inelastic (Ep <1)IncreaseDecreaseUnit Elastic (Ep = 1) Are unchangedAre unchangedElastic (Ep >1) DecreaseIncrease
اسلاید 43: Chapter 4Slide 43Market DemandPoint Elasticity of DemandFor large price changes (e.g. 20%), the value of elasticity will depend upon where the price and quantity lie on the demand curve.
اسلاید 44: Chapter 4Slide 44Market DemandPoint Elasticity of DemandPoint elasticity measures elasticity at a point on the demand curve.Its formula is:
اسلاید 45: Chapter 4Slide 45Market DemandProblems Using Point ElasticityWe may need to calculate price elasticity over portion of the demand curve rather than at a single point.The price and quantity used as the base will alter the price elasticity of demand.
اسلاید 46: Chapter 4Slide 46Market DemandAssumePrice increases from 8$ to $10 quantity demanded falls from 6 to 4Percent change in price equals: $2/$8 = 25% or $2/$10 = 20%Percent change in quantity equals: -2/6 = -33.33% or -2/4 = -50%Point Elasticity of Demand (An Example)
اسلاید 47: Chapter 4Slide 47Market DemandElasticity equals:-33.33/.25 = -1.33 or -.50/.20 = -2.54Which one is correct?Point Elasticity of Demand (An Example)
اسلاید 48: Chapter 4Slide 48Market DemandArc Elasticity of DemandArc elasticity calculates elasticity over a range of pricesIts formula is:
اسلاید 49: Chapter 4Slide 49Market DemandArc Elasticity of Demand (An Example)
اسلاید 50: Chapter 4Slide 50The Aggregate Demand For WheatThe demand for U.S. wheat is comprised of domestic demand and export demand.An Example:
اسلاید 51: Chapter 4Slide 51The Aggregate Demand For WheatThe domestic demand for wheat is given by the equation:QDD = 1700 - 107PThe export demand for wheat is given by the equation:QDE = 1544 - 176P
اسلاید 52: Chapter 4Slide 52The Aggregate Demand For WheatDomestic demand is relatively price inelastic (-0.2), while export demand is more price elastic (-0.4).
اسلاید 53: Chapter 4Slide 53CDExportDemandABDomesticDemandTotal world demand is the horizontal sum of the domestic demand AB and export demand CD.FTotal DemandEThe Aggregate Demand For WheatWheat(million bushels/yr.)Price ($/bushel)024681012141618201000200030004000
اسلاید 54: Chapter 4Slide 54Consumer SurplusConsumer Surplus The difference between the maximum amount a consumer is willing to pay for a good and the amount actually paid.
اسلاید 55: Chapter 4Slide 55The consumer surplusof purchasing 6 concerttickets is the sum of thesurplus derived from each one individually. Consumer Surplus 6 + 5 + 4 + 3 + 2 + 1 = 21 Consumer SurplusRock Concert TicketsPrice ($ perticket)23456130114151617181920Market Price
اسلاید 56: Chapter 4Slide 56Consumer SurplusThe stepladder demand curve can be converted into a straight-line demand curve by making the units of the good smaller.
اسلاید 57: Chapter 4Slide 57Demand CurveConsumerSurplusActualExpenditureConsumer Surplusfor the Market DemandConsumer SurplusRock Concert TicketsPrice ($ perticket)23456130114151617181920Market Price
اسلاید 58: Chapter 4Slide 58Consumer SurplusCombining consumer surplus with the aggregate profits that producers obtain we can evaluate:1) Costs and benefits of different market structures2)Public policies that alter the behavior of consumers and firms
اسلاید 59: Chapter 4Slide 59The Value of Clean AirAir is free in the sense that we don’t pay to breathe it.The Clean Air Act was amended in 1970.Question: Were the benefits of cleaning up the air worth the costs?An Example:
اسلاید 60: Chapter 4Slide 60The Value of Clean AirPeople pay more to buy houses where the air is clean.Data for house prices among neighborhoods of Boston and Los Angeles were compared with the various air pollutants.
اسلاید 61: Chapter 4Slide 61The shaded area gives theconsumer surplus generatedwhen air pollution is reduced by 5 parts per 100million of nitrous oxide at a cost of $1000 per part reduced.Valuing Cleaner Air200010010005ANOX (pphm)Pollution ReductionValue($ per pphmof reduction)
اسلاید 62: Chapter 4Slide 62Network ExternalitiesUp to this point we have assumed that people’s demands for a good are independent of one another.If fact, a person’s demand may be affected by the number of other people who have purchased the good.
اسلاید 63: Chapter 4Slide 63Network ExternalitiesIf this is the case, a network externality exists.Network externalities can be positive or negative.
اسلاید 64: Chapter 4Slide 64Network ExternalitiesA positive network externality exists if the quantity of a good demanded by a consumer increases in response to an increase in purchases by other consumers.Negative network externalities are just the opposite.
اسلاید 65: Chapter 4Slide 65Network ExternalitiesThe Bandwagon EffectThis is the desire to be in style, to have a good because almost everyone else has it, or to indulge in a fad.This is the major objective of marketing and advertising campaigns (e.g. toys, clothing).
اسلاید 66: Chapter 4Slide 66Positive Network Externality: Bandwagon EffectQuantity (thousands per month)Price($ per unit)D202040When consumers believe more people have purchased theproduct, the demand curve shifts further to the the right .D4060D6080D80100D100
اسلاید 67: Chapter 4Slide 67DemandPositive Network Externality: Bandwagon EffectQuantity (thousands per month)Price($ per unit)D2020406080100D40D60D80D100The market demandcurve is found by joiningthe points on the individual demand curves. It is relativelymore elastic.
اسلاید 68: Chapter 4Slide 68DemandPositive Network Externality: Bandwagon EffectQuantity (thousands per month)Price($ per unit)D2020406080100D40D60D80D100Pure PriceEffect48Suppose the price fallsfrom $30 to $20. If there were no bandwagon effect,quantity demanded wouldonly increase to 48,000$20$30
اسلاید 69: Chapter 4Slide 69DemandPositive Network Externality: Bandwagon EffectQuantity (thousands per month)Price($ per unit)D2020406080100D40D60D80D100Pure PriceEffect$2048BandwagonEffectBut as more people buythe good, it becomes stylish to own it and the quantity demandedincreases further.$30
اسلاید 70: Chapter 4Slide 70Network ExternalitiesThe Snob EffectIf the network externality is negative, a snob effect exists.The snob effect refers to the desire to own exclusive or unique goods.The quantity demanded of a “snob” good is higher the fewer the people who own it.
اسلاید 71: Chapter 4Slide 71Negative Network Externality: Snob EffectQuantity (thousandsper month)Price($ per unit)Demand2D2$30,000$15,00014Pure Price EffectOriginally demand is D2,when consumers think 2000 people have bought a good. 468D4D6D8However, if consumers think 4,000 people have bought the good,demand shifts from D2 to D6 and its snob value has been reduced.
اسلاید 72: Chapter 4Slide 72Negative Network Externality: Snob EffectQuantity (thousandsper month)2468The demand is less elastic and as a snob good its value is greatlyreduced if more people ownit. Sales decrease as a result.Examples: Rolex watches and long lines at the ski lift.Price($ per unit)D2$30,000$15,00014D4D6D8DemandPure Price EffectSnob EffectNet Effect
اسلاید 73: Chapter 4Slide 73Network Externalities and the Demands for Computers and Fax MachinesExamples of Positive Feedback ExternalitiesMainframe computers: 1954 - 1965Microsoft Windows PC operating systemFax-machines and e-mail
اسلاید 74: Chapter 4Slide 74Empirical Estimation of DemandThe most direct way to obtain information about demand is through interviews where consumers are asked how much of a product they would be willing to buy at a given price.
اسلاید 75: Chapter 4Slide 75Empirical Estimation of DemandProblemConsumers may lack information or interest, or be mislead by the interviewer.
اسلاید 76: Chapter 4Slide 76In direct marketing experiments, actual sales offers are posed to potential customers and the responses of customers are observed.Empirical Estimation of Demand
اسلاید 77: Chapter 4Slide 77The Statistical Approach to Demand EstimationProperly applied, the statistical approach to demand estimation can enable one to sort out the effects of variables on the quantity demanded of a product.“Least-squares” regression is one approach.Empirical Estimation of Demand
اسلاید 78: Chapter 4Slide 78YearQuantity (Q)Price (P)Income(I)Demand Data for Raspberries1988424101989720101990817101991131717199216101719931515171994191220199520920199622520
اسلاید 79: Chapter 4Slide 79Assuming only price determines demand:Q = a - bPQ = 28.2 -1.00PEmpirical Estimation of Demand
اسلاید 80: Chapter 4Slide 80Estimating DemandQuantity Price0510152025151052520d1d2d3DD represents demandif only P determinesdemand and then from the data: Q=28.2-1.00P
اسلاید 81: Chapter 4Slide 81Estimating DemandQuantity Price0510152025151052520Dd1d2d3d1, d2, d3 represent the demand for each income level. Including income in the demand equation: Q = a - bP + cI orQ = 8.08 - .49P + .81IAdjusting for changes in income
اسلاید 82: Chapter 4Slide 82For the demand equation: Q = a - bPElasticity: Empirical Estimation of DemandEstimating Elasticities
اسلاید 83: Chapter 4Slide 83Assuming: Price & income elasticity are constantThe isoelastic demand = The slope, -b = price elasticity of demandConstant, c = income elasticityEmpirical Estimation of DemandEstimating Elasticities
اسلاید 84: Chapter 4Slide 84Using the Raspberry data:Price elasticity = -0.24 (Inelastic)Income elasticity = 1.46Empirical Estimation of DemandEstimating Elasticities
اسلاید 85: Chapter 4Slide 85Substitutes: b2 is positiveComplements: b2 is negativeEmpirical Estimation of DemandEstimating Complements and Substitutes
اسلاید 86: Chapter 4Slide 86What Do You Think?Are Grape Nuts & Spoon Size Shredded Wheat good substitutes?The Demand for Ready-to-Eat Cereal
اسلاید 87: Chapter 4Slide 87AnswerEstimated demand for Grape Nuts (GN)Price elasticity = -2.0Income elasticity = 0.62Cross elasticity = 0.14The Demand for Ready-to-Eat Cereal
اسلاید 88: Chapter 4Slide 88SummaryIndividual consumers’ demand curves for a commodity can be derived from information about their tastes for all goods and services and from their budget constraints.Engel curves describe the relationship between the quantity of a good consumed and income.
اسلاید 89: Chapter 4Slide 89SummaryTwo goods are substitutes if an increase in the price of one good leads to an increase in the quantity demanded of the other. They are complements if the quantity demanded of the other declines.
اسلاید 90: Chapter 4Slide 90SummaryTwo goods are substitutes if an increase in the price of one good leads to an increase in the quantity demanded of the other. They are complements if the quantity demanded of the other declines.The effect of a price change on the quantity demanded can be broken into a substitution effect and an income effect.
اسلاید 91: Chapter 4Slide 91SummaryThe market demand curve is the horizontal summation of the individual demand curves for all consumers.The percent change in quantity demanded that results from a one percent change in price determines elasticity of demand.
اسلاید 92: Chapter 4Slide 92SummaryThere is a network externality when one person’s demand is affected directly by the purchasing decisions of other consumers.A number of methods can be used to obtain information about consumer demand.
اسلاید 93: End of Chapter 4Individual andMarket Demand
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