(Individual and Market Demand (Chapter 4

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Owtket Dexvunt 

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لحعجصمح() عا با ‎Vopios‏ " ‏لمموه() ادلی‎ © ocowe und Gubstituiod GPPevts ® Dake Oeweudd | 0 ‏لوو‎ Guth 0 6١56 

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لحعجصمح() عا با ‎Vopios‏ )اریز 9 © Gwpiicd Esiccatiod oP Dewecrd ۱ 0 6١56 

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Iedividudt Dewar ® Price Ckeaxnpes © Osicy the Piqures developed iu the previous vhupter, the isppact oP oo chooge io the price oP Pood coo be thostrated usicg iodPPereune DIED. 0 Oke 

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ae Kemp wack bucket be Pood (car pov cov) Oe S 

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GPPect oP a Price Okan 

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Iedividudt Dewar Dhe Teduidudt Oecvond Ourve © D0 Ieoportadt Properties oP Dewar Cures Q) Whe level oP lity: thot ‏حدس‎ be doy the pure. 0 Oke O 

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Iedividudt Dewar Dhe Teduidudt Oecvond Ourve ۱ Die koportact Properties oP Orawernd Daves Se RCD teeters ‏ری‎ ‎the‏ ر هی بط ‎utility‏ روموت و مور ‎ORG oP Pood Por clotkicgy equate‏ لا ما موجه .ب روت ‎the rotiy oP the prices oP Pood ocr‏ ‎0 6١56 ‎ ‎ ‎ 

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GPPect oP a Price Okan Oheu te price Pals: P,P, & DRE dev Pl ۰6: ۳/۳, 26/6 < ٩2 6 ۰۵: 0/۳, 200 «9 2 0 ۰1۳/۳, < SIO = C9 = DRO ‎(vate‏ یج ‎ ‎ ‎ ‎0 Oke 1D ‎ 

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Iedividudt Dewar © ocowe Chanyes © ‏سا ومد‎ Figures developed io the previous Dhupter, the isppact oP oo chooge io the iaoowe 0 Olde 1d 

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20 ,۵ یه 239 0 ,860 ,2900 1 

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Iedividudt Dewar © ocowe Chanyes ۰ ۱ ‏نج ها هت‎ pot ‏ی‎ cb bord orci diothicy associated with every iacowe level. لح 0 

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Iedividudt Dewar جعجا0) یب " ‎wows shits the budget hee t7‏ جز جكمص صم ول و ‎he‏ راد مرج توارط ‎the‏ ‎Giotoceruly, the inoreuse in iwowe shits‏ و ‎the dewoe>d purve to the right.‏ ‎0 Oke 1S ‎ 

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Iedividudt Dewar Qoreed Good vs. TePerior Bood ® dapowe Okunyes © Okes the ‏اوح‎ curve kes a positive slope: ‏نوم با‎ dewourded iuoreuses Wilk از ‎oP dewued is positive.‏ نوماه موس ب/ ۰ ‎Phe yood is 0 wrwdl youd.‏ * 0 Oke 10 

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Iedividudt Dewar Qoreed Good vs. TePerior Bood ‏ا"‎ ocowe Chanyes © kes the ‏ساموت‎ curve kas a ‏موه مره‎ ٠ DT Re quoniiy deworded demreuses wilt owe. ۰/۱ ‏رومام موم‎ oP dewoed is ceyive. © The yood is ua inferior wood. ع0 لب 0 

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Iedividudt Dewar # Gage Curves © Gael coves rele the quontipy oP «ood ‏صا‎ ١ 04 the yood is ‏هس‎ wrwd wod, the 2 ‏عمصج اعبج‎ is upward slopiccy. 041 the ypood is oo iePerior yood, the Gaget لح 0 

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Gugel Cuves یو ‎(Sper‏ ‎wok) OD‏ واه ‎cnet curves‏ ‎wpward Por‏ عدي لس ‎eo‏ ‏10 ‏ضس) لس أ 19 19 © ©« 0 0 ۵ 60 

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Gugel Cuves (Spr wok) OO cnpl owes shy oD Por ‏ی وی‎ ood (uct © & 9 9 9 ‏ملس‎ 

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0 ‏عحسلمحعو س2‎ to the Ovited Grates ‘eos Brow (1G? $) Oxpendire Less inn 0,©2000- OO,000-GO,000-FO,ODO-GO,O0O- ?0,000- 4 x ۳ 3 : ‎OF? CeTE 00 6066 6666© 0‏ 200 سينا ‎Ouxned Ourlkxe 4089 0۴89 6666 9666 ©6666 99 6666©‏ ‎(OST CIPO 970 699 8097 860 9‏ اس ‎Rected‏ ‏69 908 099 4690 4969 4990 4694 عون لصا ‎ood 6090 999 009 6909 9689 600 6666 ‏باون‎ 999 9۶9 999 7۶9 ۶۶9 918 OFFS ‎ ‎ ‎ 

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Iedividudt Dewar Gubstiues dad Opwplewedts 0) Dw woods ure powdered substitutes Poa oreuse (decrease) fa the prive oP vue leads to wo fmreuse (decree) io the ‎dewonded pF the viker.‏ منت ‎ey. wovie fickets ocd video nectaks‏ * ‏وه ی 0 ‎ ‎ ‎ 

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Iedividudt Dewar Gubstiues dad Opwplewedts و ‎chooge it the price oP oo yood kus‏ ‎w ef Pent oo the quoctiy dewodded oP the‏ ‎vier‏ 0 Obte OS 

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Iedividudt Dewar ® Gubsitutes oad Oowpleweuts ‏اه‎ price vous nepiivd curve is dowoward- slopicn, the tuo yoods ure pousidered substitutes. ‏اه‎ price poo nopivd cove is upyvord- slopicg, the tuo «woods are pousidercd powpleweuts. # Dkev could be bots! ی 0 

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wows ud Gubsituiod CPPRevts © Palin the prive oP a qpood hos tw ePPevts: Gubstitutioa & Taoowe © Gubstiuica GPRevt * Ooesuvers will tex to buy wore oP the ood that has beoowe relatively cheaper, 0 Oke ‏عه‎ 

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wows ud Gubsituiod CPPRevts © Palin the prive oP a qpood hos tw ePPevts: Gubstitutioa & Taoowe )یی و سجر مر ‎eres praperteere sears‏ را حون ‎purchusiagy power whe the price oP‏ ‎youd Pals.‏ 0 Oke SO 

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wows ud Gubsituiod CPPRevts © Gubstituioa GPPevt © Phe subsiituica ePRevt is the chooge in ot ‏د مدا‎ coos ucppicd ussocicted wits a choo it the price oP the itew, with the fevel of uth: Ket! 75/01 © Dkeu the prive ‏,یل مجلا جه خام‎ the substituiog ‏تام‎ always leads to ‏وحم من‎ ‏بكسي دكا دز‎ oP the iteoy deworded. 0 Obte SS 

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wows ud Gubsituiod CPPRevts ۱ ‏ورین‎ PP evt ‏ه‎ ۱ fooowe ePPevt is the chooge ۲ ‏جوا مه‎ pousuvpiicg brought about by the iaareuse ia purchasioy power, with the price of the iteor Kekd costed. © Okeu uv person's owe ‏مهس‎ the fooreuse pr devreuse. 0 ۵» 0 

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wows ud Gubsituiod CPPRevts ۱ ‏ورین‎ PP evt © Gved wi ‏واوا‎ «woods, the taoowe ‏دا ولاك‎ roel) barge euough to vuteigh the substituiod ‏.ایا‎ 

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,۳ ,اج موف یط ‎‘The‏ ‏ین Dke roowe een, CP, (Brow Ow ©) keeps rekae ۲ ‏وات‎ te prive oP Pood Poly, Ne Peg poenpion korewes by P{Po or te wok) RQ ‏محر‎ woes Prow Ob @. مدا مه مسر ‎Par.‏ با ‎eee‏ ری ~ ‎ie ee 8‏ ‎٠‏ ,© © 1 چ و ه 0 ‎hv 80‏ سب 

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wows ud Gubsituiod CPPRevts = Gpevidl Cuse--The GiPeu Good © Dhe inoowe ePPevt wap theoreticaly be hare ‏نوج‎ to couse the dewoed purve Por a yood t7 slope upward. © Dhis rarely voours ud is oF ithe protic terest. 0 Obde OE 

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GPPect oF a Gasoline Nox Dik o Reboe a Ossuwe ۰ ۱-9 © Naame = $9,000 © Price of cuevine = $0 ی 0 

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GPPect oF a Gosvlice Tux Ok o Rebate 

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Ourket Oewenrd Crow Tedvidud to Darket Oeweerd © Darket Dewar Cures ® 0 ane that relates the quaaity oP a youd that al io worket buy to the prive oP that wood. 0 Oke O7 

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QOetercotatcry the Quarket Oeweard Ouve Price ‘Irth @ ‏سل ۰ 6 یه‎ O ‏ه272‎ (crite) (vets) 99 99 qe 00 9 Okt SO (ucts) aoae 99 Odo er er (vets) 9 e 9 oO 0 8 0 9 9 0 9 

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Gureoetagy ta Obtar a Ourket Oewurd Ouve 

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Ourket Oewenrd = Dw epportact Points ‎Che worket deworrd wil shiPt to‏ الك ‎wore poUSsUeErs Bue‏ ود لب ‎the‏ ‏سا ‎©) (Pavtors that icPhueure the ‏مرول‎ oP way cownvers will sv PP ect the warket deweed. ‎0 ۵ FO ‎ 

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Ourket Oewenrd ® Ghosticity oP Dewar Reval: Price elasticity oP deword weusures the perceutage choogye io the quoctiy decwcdaded ‏بلج‎ Poo o C-percedt choc it prive. 7 -AQ/Q_AQIAP \ ۸۴/۴ 2 

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Price ‏رس‎ acd لو حون ‎P Pree berowes, PPrev‏ تسس ‎Ororeers,‏ ‎ere alii Dereon‏ (0,>0) سس 0 لا وه )4=,@( ‎Out Chow‏ سیب تسه )(> ,@( ‎Chetc‏ لب 0 

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Ourket Oewenrd ® ot Chosticity oP Dewerrd © Por hare prive chor (F.y. CO%), the udtue oP elasticity wil depeod upoo where the 0 Obde PS 

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Ourket Oewenrd ® ot Chosticity oP Dewerrd ۱ of 0 poidt oo \ Fr=(P/Q)(1/alpe. © ی 0 

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Ourket Oewenrd ® Prblews Osicry (Pict Chasticity ® De ww weed ty collate prive elasticity pve portiva oP the decmoed curve ‏ما اه‎ ‏اج‎ © Phe prive ond quently used us the base will 0 Obde PS 

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Ourket Oewenrd Potct Chasticty oP Orwerd (Ba Crepe) " Ossuwve © Prive terrors Prow O§$ to $0 query deworded Pals Prow © ‏6م‎ ‎change ic price equ:‏ مین و 0 - 59/500 7 9590 < 90/809 ‎equa: -0/0‏ نمی دا من و 9 60 - 6/8 7 910 ‎ ‎0 Obde FO ‎ ‎ ‎ 

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Ourket Oewenrd " Chosticity equa: -99.99/.8S = -1.99 or -.SO/.CO = - 990 ی ها سوه ‎Ohh‏ © عن ولا سوه 

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Ourket Oewenrd با جع وروا د ان 1 ‎DP prices‏ © ts Poveda ts: Ep=(AQAP)(P/Q) \ P=the averegprice Q=the averegquanti 0 Oke FO 

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Ourket Oewenrd ‎oP Dewar (Da Cxcxvpl)‏ رانا ‎Oro‏ "ا ‎Fr=(AQAP)(P/Q)‏ ‎P, =8, P:=10Q=6Q=4‏ ‎P=189/2=9&Q =10/2=5‏ ‎E =(- 2/$2)($9/5) =- 1.8‏ ‎0 Obde FO ‎ 

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00 ) ۰ظ) Tre ®ygreqaie Dewar Cor Okeut # Dke dewoed Por 0.6. wheat is vowprised oP dowestio dewodd und export ‏.لووول‎ ‏سلب0‎ © Ohl SO 

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Dee Oyyrevyate Dewar Por ‏و‎ ‎OD ke dowestio dewoed Por whet is yvec‏ "ا ‎by the equetivd:‏ ‎Qoo = VP OO - dO? P‏ © ‎00 ‎5 ۱۱ ‏یسیو‎ Por whet is ‏برط وديف‎ the equetivs: ‏,رن ه‎ = (EFF - 0 ‎00 ‎ 

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Dee Oyyrevyate Dewar Por ‏و‎ ® Qowestic dewern is rehtively price toehstic (-O.8), while export dewuerd is wore price elastic (-D.P). 0 Obte SO 

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‎Gurphs‏ وونل ‎® Conver Gurphus ‎© Dhe dPPerewe between the wort ‏اون‎ is wiley to poy Por o ‎ ‏ی 0 ‎ 

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‎Gurphs‏ وونل ‎9 ۱۱۱ ‏یواست‎ gue oo be ‏رصح لححمجل جونا-كالصاك + صلما لجامجمووص‎ by svubicry the cits ‏.ءسادصك لوي هوا خاص‎ ‎0 Obte SO ‎ 

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‎Gurphs‏ وونل ‎® ‏مج مایب‎ surphes with the poo evolve: ‎() Costs ved becePits oP ‏محمد نالك‎ worket structures ‎eS) Cubic policies that uler the bekavior oP ‏ومصن"ا له موس‎ ‎0 Oke SO ‎ 

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سادركه :2 ه09 Tre Ode oP Oleua @ir © ir is Pree in the seuse that we doo’t pop to breathe ۰ ‎The Olews Oir Ort wos oveuded ict‏ ا" ‎adoro.‏ ‎® Qvesivd: Oere the bevePits oP ‏مان‎ up ‎0 Obte SO ‎ 

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Tre Ouke oP Clea ir ® people poy wore to buy houses where the ur is reo. ® Dats Por hows prives wooo ۱ @osiod und bos Ouyetes were vowpured wih the ‏عضو‎ i 0 ۵» 0 

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) ان عون أن 0 One (S per poke 

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QOework Cxtercoliies ® Opto ths port we ‏اما یجوم عم‎ people's desvods Por a yood ure indepecded oP ‏اه عون‎ BP Poot, 0 person's deweed wap be 0 605-68 

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QOework Cxtercoliies BP this is the oes, ‏هعمج رباع هن‎ Exists. © Detuork extercoiiies coo be positive or Ue ive. ی 0 

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QOework Cxtercoliies © 0 postive cetwork extercolip exists P the querctiy oP a yood dewoaded by a ۲۳۲۲۲۵۹۲7 117171205125 1 1525721701512 17 ‏كل‎ ‏اه بط وت و موز‎ DOUANDETS. a Orvaive veto extercoliies ane just the Dppusite. 0 Obde OF 

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QOework Cxtercoliies # Dke Oucrdhwagoa GPP evt © Dhis ip the desire to be in sive, to hove ‏لوص ه‎ bevouse ukvost evervour else kus it, or ۲ ‏انز‎ it a Pod. © Dhis is the wuior vbjeviive oF woarketiog ord ‏مه وله‎ (e-y. tov, clic). 0 ‏لب‎ OS 

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Positive Deiwork ‏:رل‎ Cardo GPRect 

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@uncdkuapd GPPRevt Positive Deiwork Gxtercraliy’ 

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@uncdkuapd GPPRevt Positive Deiwork Gxtercraliy’ 

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@uncdkuapd GPPRevt Positive Deiwork Gxtercraliy’ 

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QOework Cxtercoliies ® Dke Guoob CPPent ‎extercoliy is ceyoive, o sub‏ ری باه ‎© Dhe sovb ef Peo rePers to the desire to ‎© Dke quoctiy dewodded bP a “sab” yood is higher the Rewer the people who pw it. ‎0 Ob TO ‎ 

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506,000 

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من اه یماح لوط ۲۶ بای & ‎ty ihe‏ موب ‎woo swh‏ $49,000 

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QOetwork @xterculiies wed the Dewaeds Por Cowwputers and Pux Quokices ® Gxanples vf Positive eedbauck Oxtercraliies ‏و‎ OucPranve vowputers: (OSE - (Q8S © Oise Diets PC vperaiioy systew امس له من و 0 Oke TS 

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Cwpricd Csicvaiod cP Dewar ® OD ke wost treet wup to obtae ePorvotiod bout dewued is thovugh isterviews Where powanvers ure ‏ه خأت اج تیا تفه‎ produnt they would be willie to buy oto ‏وطامام] رش‎ عع ی 0 

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Gwopiricd Csicvatiod oP Oewecrd ® Probew ‎way hack inPor<vative pr interest,‏ رز وه ‎or be wistead by the interviewer.‏ ‎0 Oke TS ‎ 

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Cwpricd Csicvaiod cP Dewar Bt drect warketay experiveds, uct soles veers ure posed to pote pustowers und the espouses ve pustowers ure observed. 0 Oke TO 

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Cwpricd Csicvaiod cP Dewar BD ke Statistical @pprouklk to Dewuerd Cstrcrctica ® Property upped, the stoisizal upproack to ‏ارم موه موی‎ var to sort ‏نص‎ ‎the ePPevts oP vartubles va the questi dewernded oP o procuct. 0 Deustsquares” neqressiva is ‏ا‎ عم ولاق 0 

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QOewerd Duta Por (۵ Year Queaty (Q) Price (P) ‘keowe(1) 999 6 cor 00 999 7 co dO 990 9 ae dO 4990 09 ae ar 499 06 do ar 4999 06 as ae 0666 (ao de co 4999 0 9 co 499 8 6 co 

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Gwopiricd Csicvatiod oP Oewecrd 9 ‏اوه رممیجء()‎ price deterwices dewerrd: ®Q=u-bP 06 06.6 - و »© 0 Oke TS 

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0 ‏او دحوم‎ Pod @ deerokes deword ond hea Prow the data? G=89.8-.00P Otte OO 

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Uy Uy Uo ‏لجمط سا موه‎ Por rack ‎Dexa‏ شزو ‎Pre Odhustiog Por chooges ict ipo‏ ‎ ‎ ‎ ‎ ‎fewows level. Teckidterg terre ta the deco ‏عن لس + 0 - ۰ < 6 :جر‎ 06 - .89 + 7 ‎ ‎ ‎0 ۵» 0 ‎ 

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‎Csicvaiod oP Oewacrt‏ مق ‎ ‎ ‏حطاساست!) ب2ظ) ‎the dewuedd equatiod: Q=ua-bP‏ ) ظ ‎"Choir: Ep =(AQ/AP)(P/Q =- HP/Q ‎۱ ‎0 Oke OO ‎ ‎ ‎ 

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‎Csicvatiod pP Oewead‏ م6 ‎ ‎ ‎Estate Closticties ‎" 85 Price & ioowe ehostivity are powstaat ‎© Dhe isvehestic dewerrd = logQ =a- blog@)+ clog) \ © The slope, -b = prive closticiy oP deco ‎® Constant, & = owe elusticiy ‎0 Oke OS ‎ ‎ ‎ 

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‎Csicvaiod oP Oewacrt‏ مق ‎ ‎ ‎Estate Closticties a Osicg the Ruspbery data: logQ =- 0.81- 2.4log®@) +1.4dog@ ‎-O.CF (Iaetesiir)‏ ع رواد ‎Prive‏ و ‏9 2 اه سیب ه ۱ ‎P‏ سجن ‎Oe OF ‎ ‎ ‎ 

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0 Cstroatey Oowplespecis und Gubsitues logQ =a- blog® +b, logP, + clog) § Gubstiutes: b, is posiive ® Oowpleweuts: bts ‏عمج‎ 0 Oke OS 

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Phe Dewar Por ‏ون رل‎ # Oka Ov You Thick? © Ore Grape Outs & ‏موه‎ Size Shredded Okeut «ood substitues? 0 Oke OO 

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Phe Dewar Por ‏ون رل‎ ® @oswer ® Cotwated dower Por rape Due (BO) )" 9801710: + ‏0:وج0(801)‎ + "860890: -866:]- (“OSor ۰ ‏واه‎ - -6 .0 ‏,واه میم‎ 2 * Cross ‏تساه‎ 2 06 عه ولا 0 

صفحه 88:
060 8 dodvidudl poasuwers’ dewoed pues Por ‏موی لو هن‎ be derived Prow iePorvatiod ubvut their tustes Por ull yoods and servives ud Prow their budget ® Goel paves desoribe the relaioaship betwee the quoctiy oP a yood poured 0 0 Olde 66 

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060 5 ‏و رن زر‎ substitutes iP oa toreuse ‏جز‎ the price oP poe youd feeds 0 fuoeeuse i the quoctiy dewurded oP the viker. Dkev une voswpleweuts iF the ‏بكسي‎ dewoaded oP the viher devlues. 0 Oke OS 

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060 © Pw ‏و من ۳ تیانج و رن‎ in the Prive oP poe youd feads to ‏ع و وحم و‎ ‏رن‎ decwe>nded oP the other. Mey ore powpleweus iP the quoctiy deccaded oP the ‏سل سا‎ ‎the questi‏ مه من وس و ‎of‏ تام ب۲/ ظ ‎deworded coc be broken foto a substituica ePPert‏ ‎wed oo fapowe BPP ert.‏ ‎0 ۵» OD ‎ 

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060 © De worket dewoed vurve is the horizvatel ‏ره لول له لا چاه تومیر‎ 9 ‏مس ب۱۱/‎ chore fo quoctty decoded that results Prow ‏هن‎ poe percedt chore ict ۱ ‏ار‎ detersviues elustiviy oP ‏سل‎ 0 Oke Od 

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060 8 OD here isu cetwork extercoliy whe poe persou's dewoedd is oPRevted dinenty by the purchusiay devisivus ‏ان ان‎ DOWNES. 2 aber of wethods von be wed to obtatc ‏واه‎ about poorer ‏اس‎ 0 Obte SS 

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6 ودار ۴و ‎Gud‏ ‏مه ایلبریلی» 

Chapter 4 Individual and Market Demand Topics to be Discussed  Individual Demand  Income and Substitution Effects  Market Demand  Consumer Surplus Chapter 4 Slide 2 Topics to be Discussed  Network Externalities  Empirical Estimation of Demand Chapter 4 Slide 3 Individual Demand  Price Changes  Using the figures developed in the previous chapter, the impact of a change in the price of food can be illustrated using indifference curves. Chapter 4 Slide 4 Effect of a Price Change Clothing (units per month) Assume: •I = $20 •PC = $2 •PF = $2, $1, $.50 10 6 A U1 5 D B U3 4 Three separate indifference curves are tangent to each budget line. U2 4 Chapter 4 12 20 Food (units per month) Slide 5 Effect of a Price Change The price-consumption curve traces out the utility maximizing market basket for the various prices for food. Clothing (units per month) 6 A Price-Consumption Curve U1 5 D B U3 4 U2 4 Chapter 4 12 20 Food (units per month) Slide 6 Effect of a Price Change Price of Food Individual Demand relates the quantity of a good that a consumer will buy to the price of that good. E $2.00 G $1.00 Demand Curve $.50 H 4 Chapter 4 12 20 Food (units per month) Slide 7 Individual Demand The The Individual Individual Demand Demand Curve Curve  Two Important Properties of Demand Curves 1) The level of utility that can be attained changes as we move along the curve. Chapter 4 Slide 8 Individual Demand The The Individual Individual Demand Demand Curve Curve  Two Important Properties of Demand Curves 2) 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 and clothing. Chapter 4 Slide 9 Effect of a Price Change When the price falls: Pf/Pc & MRS also fall Price of Food E $2.00 •E: Pf/Pc = 2/2 = 1 = MRS •G: Pf/Pc = 1/2 = .5 = MRS •H:Pf/Pc = .5/2 = .25 = MRS G $1.00 Demand Curve $.50 H 4 Chapter 4 12 20 Food (units per month) Slide 10 Individual Demand  Income Changes  Using the figures developed in the previous chapter, the impact of a change in the income can be illustrated using indifference curves. Chapter 4 Slide 11 Effects of Income Changes Clothing (units per month) Assume: Pf = $1 Pc = $2 I = $10, $20, $30 7 D 5 U2 B 3 A 4 Chapter 4 U1 10 16 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 12 Effects of Income Changes Price of food An increase in income, from $10 to $20 to $30, with the prices fixed, shifts the consumer’s demand curve to the right. E $1.00 G H D3 D2 D1 4 Chapter 4 10 16 Food (units per month) Slide 13 Individual Demand  Income Changes The income-consumption curve traces out the utility-maximizing combinations of food and clothing associated with every income level. Chapter 4 Slide 14 Individual Demand  Income Changes  An increase in income shifts the budget line to the right, increasing consumption along the income-consumption curve.  Simultaneously, the increase in income shifts the demand curve to the right. Chapter 4 Slide 15 Individual Demand Normal Normal Good Good vs. vs. Inferior Inferior Good Good  Income Changes  When the income-consumption curve has a positive slope:  The quantity demanded increases with income.  The income elasticity of demand is positive.  The good is a normal good. Chapter 4 Slide 16 Individual Demand Normal Normal Good Good vs. vs. Inferior Inferior Good Good  Income Changes  When the income-consumption curve has a negative slope:  The quantity demanded decreases with income.  The income elasticity of demand is negative.  Chapter 4 The good is an inferior good. Slide 17 An Inferior Good Steak 15 (units per month) Income-Consumption Curve C 10 Both hamburger and steak behave as a normal good, between A and B... U3 …but hamburger becomes an inferior good when the income consumption curve bends backward between B and C. B 5 U2 A U1 5 Chapter 4 10 20 30 Hamburger (units per month) Slide 18 Individual Demand  Engel Curves  Engel curves relate the quantity of good consumed to income.  If the good is a normal good, the Engel curve is upward sloping.  If the good is an inferior good, the Engel curve is downward sloping. Chapter 4 Slide 19 Engel Curves Income ($ per month) 30 Engel curves slope upward for normal goods. 20 10 0 Chapter 4 4 8 12 16 Food (units per month) Slide 20 Engel Curves Income ($ per month) 30 Inferior 20 Engel curves slope backward bending for inferior goods. Normal 10 0 Chapter 4 4 8 12 16 Food (units per month) Slide 21 Consumer Expenditures in the United States Income Group (1997 $) Expenditure 70,000($) on: Less than 1,000- 20,000-30,000-40,000-50,000$10,000 19,000 29,000 39,00049,00069,000and above Entertainment 700 947 Owned Dwellings 1116 1725 2253 3243 4454 5793 9898 Rented Dwellings 1957 2170 Health Care Food Clothing 1031 1697 2656 3385 859 978 1274 1514 2054 2654 4300 2371 2536 2137 1918 1820 2052 1540 1266 2214 2642 4109 4888 5429 6220 8279 1363 1772 1778 2614 3442 Individual Demand Substitutes Substitutes and and Complements Complements 1) 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.  Chapter 4 e.g. movie tickets and video rentals Slide 23 Individual Demand Substitutes Substitutes and and Complements Complements 2) 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.  Chapter 4 e.g. gasoline and motor oil Slide 24 Individual Demand Substitutes Substitutes and and Complements Complements 3) Two goods are independent when a change in the price of one good has no effect on the quantity demanded of the other Chapter 4 Slide 25 Individual Demand  Substitutes and Complements  If the price consumption curve is downwardsloping, the two goods are considered substitutes.  If the price consumption curve is upwardsloping, the two goods are considered complements.  They could be both! Chapter 4 Slide 26 Income and Substitution Effects  A fall in the price of a good has two effects: Substitution & Income  Substitution  Chapter 4 Effect Consumers will tend to buy more of the good that has become relatively cheaper, and less of the good that is now relatively more expensive. Slide 27 Income and Substitution Effects  A fall in the price of a good has two effects: Substitution & Income  Income Effect Consumers experience an increase in real purchasing power when the price of one good falls. Chapter 4 Slide 28 Income and Substitution Effects  Substitution Effect  The 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. Chapter 4 Slide 29 Income and Substitution Effects  Income Effect  The 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. Chapter 4 Slide 30 Income and Substitution Effects  Income Effect  Even with inferior goods, the income effect is rarely large enough to outweigh the substitution effect. Chapter 4 Slide 31 Income and Substitution Effects: Normal Good Clothing (units per month) When the price of food falls, consumption increases by F1F2 as the consumer moves from A to B. R C1 The substitution effect,F1E, (from point A to D), changes the relative prices but keeps real income (satisfaction) constant. A D C2 B U2 Substitution Effect O Chapter 4 F1 Total Effect The income effect, EF2, ( from D to B) keeps relative prices constant but increases purchasing power. U1 E S F2 T Income Effect Food (units per month) Slide 32 Income and Substitution Effects: Inferior Good Clothing (units per month) Since food is an inferior good, the income effect is negative. However, the substitution effect is larger than the income effect. R A B U2 D Substitution Effect O Chapter 4 F1 U1 E S Total Effect F2 T Food (units per month) Income Effect Slide 33 Income and Substitution Effects  A Special Case--The Giffen Good  The 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. Chapter 4 Slide 34 Effect of a Gasoline Tax With a Rebate  Assume Ped = -0.5 Income Price Chapter 4 = $9,000 of gasoline = $1 Slide 35 Effect of a Gasoline Tax With a Rebate Expenditures On Other Goods ($) F After Gasoline Tax Plus Rebate A •$.50 Excise Tax •Gasoline = 900 gallons •$450 REBATE •New budget line •Consumer is worse off After Gasoline Tax H C = 1200 gallons •Other expenditures = $7800 E U2 U3 U1 900 913.51200 D Chapter 4 •Gasoline J B Original Budget Line Gasoline Consumption (gallons/year) Slide 36 Market Demand From From Individual Individual toto Market Market Demand Demand  Market Demand Curves A curve that relates the quantity of a good that all consumers in a market buy to the price of that good. Chapter 4 Slide 37 Determining the Market Demand Curve Price ($) Individual A (units) Individual B (units) Individual C (units) 1 6 1016 32 2 4 813 25 3 2 610 18 4 0 47 11 5 0 24 6 Chapter 4 Market (units) Slide 38 Summing to Obtain a Market Demand Curve Price 5 The market demand curve is obtained by summing the consumer’s demand curves 4 3 Market Demand 2 1 0 Chapter 4 DA 5 DB 10 DC 15 20 25 30 Quantity Slide 39 Market Demand  Two Important Points 1) 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. Chapter 4 Slide 40 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 41 Price Elasticity and Consumer Expenditure Demand Decreases, If Price Increases, If Price Inelastic (Ep <1) Expenditures: Increase Expenditures: Decrease Unit Elastic (Ep = 1) Are unchanged Are unchanged Elastic (Ep >1) Decrease Increase Chapter 4 Slide 42 Market Demand  Point Elasticity of Demand  For large price changes (e.g. 20%), the value of elasticity will depend upon where the price and quantity lie on the demand curve. Chapter 4 Slide 43 Market Demand  Point Elasticity of Demand  Point elasticity measures elasticity at a point on the demand curve.  Its formula is: EP (P/Q)(1/sl ope) Chapter 4 Slide 44 Market Demand  Problems Using Point Elasticity  We 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. Chapter 4 Slide 45 Market Demand Point Point Elasticity Elasticity of of Demand Demand (An (An Example) Example)  Assume  Price increases from 8$ to $10 quantity demanded falls from 6 to 4  Percent change in price equals: $2/$8 = 25% or $2/$10 = 20%  Percent change in quantity equals: = -33.33% or -2/4 = -50% Chapter 4 -2/6 Slide 46 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  Which one is correct? Chapter 4 Slide 47 Market Demand  Arc Elasticity of Demand  Arc elasticity calculates elasticity over a range of prices  Its formula is: EP ( Q/P)(P / Q) P the averag e price Q the averag e quantity Chapter 4 Slide 48 Market Demand  Arc Elasticity of Demand (An Example) EP ( Q/P)(P / Q) P 8, P 10,Q 6,Q 4 P 18/ 2 9&Q 10/ 2 5 E ( 2/ $2)($9/ 5)  1.8 1 2 1 2 p Chapter 4 Slide 49 An Example: The Aggregate Demand For Wheat  The demand for U.S. wheat is comprised of domestic demand and export demand. Chapter 4 Slide 50 The Aggregate Demand For Wheat  The domestic demand for wheat is given by the equation: Q DD  = 1700 - 107P The export demand for wheat is given by the equation: Q DE Chapter 4 = 1544 - 176P Slide 51 The Aggregate Demand For Wheat  Domestic demand is relatively price inelastic (-0.2), while export demand is more price elastic (-0.4). Chapter 4 Slide 52 The Aggregate Demand For Wheat Price ($/bushel) 20 18 16 Total world demand is the horizontal sum of the domestic demand AB and export demand CD. A 14 12 10 8 C E Total Demand 6 4 Export Demand 2 0 Chapter 4 1000 Domestic Demand D B 2000 F 3000 Wheat(million bushels/yr.) 4000 Slide 53 Consumer Surplus  Consumer Surplus The difference between the maximum amount a consumer is willing to pay for a good and the amount actually paid. Chapter 4 Slide 54 Consumer Surplus Price ($ per ticket) The consumer surplus of purchasing 6 concert tickets is the sum of the surplus derived from each one individually. 20 19 18 17 16 15 14 Consumer Surplus 6 + 5 + 4 + 3 21 + 2 + 1 = Market Price 13 0 Chapter 4 1 2 3 4 5 6 Rock Concert Tickets Slide 55 Consumer Surplus  The stepladder demand curve can be converted into a straight-line demand curve by making the units of the good smaller. Chapter 4 Slide 56 Consumer Surplus Price ($ per ticket) Consumer Surplus for the Market Demand 20 19 18 17 16 15 14 Consumer Surplus 1/2x(20  14)x6,500  $19,500 Market Price 13 Demand Curve Actual Expenditure 0 Chapter 4 1 2 3 4 5 6 Rock Concert Tickets Slide 57 Consumer Surplus  Combining consumer surplus with the aggregate profits that producers obtain we can evaluate: 1) Costs and benefits of different market structures 2) Public policies that alter the behavior of consumers and firms Chapter 4 Slide 58 An Example: The Value of Clean Air  Air is free in the sense that we don’t pay to breathe it.  The Clean Air Act was amended in 1970.  Question: Were the benefits of cleaning up the air worth the costs? Chapter 4 Slide 59 The Value of Clean Air  People pay more to buy houses where the air is clean.  Data for house prices among neighborhoods of Boston and Los Angeles were compared with the various air pollutants. Chapter 4 Slide 60 Valuing Cleaner Air Value ($ per pphm of reduction) 2000 1000 0 Chapter 4 A 5 The shaded area gives the consumer surplus generated when air pollution is reduced by 5 parts per 100 million of nitrous oxide at a cost of $1000 per part reduced. 10 NOX (pphm) Pollution Reduction Slide 61 Network Externalities  Up to this point we have assumed that people’s demands for a good are independent of one another.  If fact, a person’s demand may be affected by the number of other people who have purchased the good. Chapter 4 Slide 62 Network Externalities  If this is the case, a network externality exists.  Network externalities can be positive or negative. Chapter 4 Slide 63 Network Externalities  A positive network externality exists if the quantity of a good demanded by a consumer increases in response to an increase in purchases by other consumers.  Negative network externalities are just the opposite. Chapter 4 Slide 64 Network Externalities  The Bandwagon Effect  This is the desire to be in style, to have a good because almost everyone else has it, or to indulge in a fad.  This is the major objective of marketing and advertising campaigns (e.g. toys, clothing). Chapter 4 Slide 65 Positive Network Externality: Bandwagon Effect Price ($ per unit) D20 D40 D60 D80 D100 20 Chapter 4 40 60 80 When consumers believe more people have purchased the product, the demand curve shifts further to the the right . 100 Quantity (thousands per month) Slide 66 Positive Network Externality: Bandwagon Effect Price ($ per unit) D20 D40 D60 D80 D100 The market demand curve is found by joining the points on the individual demand curves. It is relatively more elastic. Demand 20 Chapter 4 40 60 80 100 Quantity (thousands per month) Slide 67 Positive Network Externality: Bandwagon Effect Price ($ per unit) D20 D40 D60 D80 D100 $3 0 Suppose the price falls from $30 to $20. If there were no bandwagon effect, quantity demanded would only increase to 48,000 Demand $2 0 Pure Price Effect 20 Chapter 4 40 4860 80 100 Quantity (thousands per month) Slide 68 Positive Network Externality: Bandwagon Effect Price ($ per unit) D20 D40 D60 D80 D100 But as more people buy the good, it becomes stylish to own it and the quantity demanded increases further. $3 0 Demand $2 0 Pure Price Effect Bandwagon Effect 20 Chapter 4 40 48 60 80 100 Quantity (thousands per month) Slide 69 Network Externalities  The Snob Effect  If the network externality is negative, a snob effect exists.  The snob effect refers to the desire to own exclusive or unique goods.  The quantity demanded of a “snob” good is higher the fewer the people who own it. Chapter 4 Slide 70 Negative Network Externality: Snob Effect Price ($ per unit) Originally demand is D2, when consumers think 2000 people have bought a good. Demand $30,000 However, if consumers think 4,000 people have bought the good, demand shifts from D2 to D6 and its snob value has been reduced. $15,000 D2 D4 D8 2 Chapter 4 4 6 8 Pure Price Effect D6 14 Quantity (thousands per month) Slide 71 Negative Network Externality: Snob Effect Price ($ per unit) The demand is less elastic and as a snob good its value is greatly reduced if more people own it. Sales decrease as a result. Examples: Rolex watches and long lines at the ski lift. Demand $30,000 Net Effect Snob Effect $15,000 D2 D4 D8 2 Chapter 4 4 6 8 Pure Price Effect D6 14 Quantity (thousands per month) Slide 72 Network Externalities and the Demands for Computers and Fax Machines  Examples of Positive Feedback Externalities Mainframe Microsoft computers: 1954 - 1965 Windows PC operating system Fax-machines Chapter 4 and e-mail Slide 73 Empirical Estimation of Demand  The 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. Chapter 4 Slide 74 Empirical Estimation of Demand  Problem Consumers may lack information or interest, or be mislead by the interviewer. Chapter 4 Slide 75 Empirical Estimation of Demand  In direct marketing experiments, actual sales offers are posed to potential customers and the responses of customers are observed. Chapter 4 Slide 76 Empirical Estimation of Demand  The Statistical Approach to Demand Estimation  Properly 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” Chapter 4 regression is one approach. Slide 77 Demand Data for Raspberries Year 1988 1989 1990 1991 1992 1993 1994 1995 1996 Chapter 4 Quantity (Q) 4 7 8 13 16 15 19 20 22 Price (P) 24 20 17 17 10 15 12 9 5 Income(I) 10 10 10 17 17 17 20 20 20 Slide 78 Empirical Estimation of Demand  Assuming only price determines demand: Q = a - bP Q = 28.2 -1.00P Chapter 4 Slide 79 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 5 D d3 0 Chapter 4 5 10 15 20 25 Quantity Slide 80 Estimating Demand Adjusting for changes in income Price 25 d1, d2, d3 represent the demand for each income level. Including income in the demand equation: Q = a - bP + cI or Q = 8.08 - .49P + .81I 20 15 d1 10 d2 5 D d3 0 Chapter 4 5 10 15 20 25 Quantity Slide 81 Empirical Estimation of Demand Estimating Estimating Elasticities Elasticities  For the demand equation: Q = a - bP  Elasticity: EP (Q / P)(P / Q)  b(P / Q) Chapter 4 Slide 82 Empirical Estimation of Demand Estimating Estimating Elasticities Elasticities  Assuming: Price & income elasticity are constant The isoelastic demand = log(Q) a  blog(P)  clog(I ) The slope, -b = price elasticity of demand Constant, Chapter 4 c = income elasticity Slide 83 Empirical Estimation of Demand Estimating Estimating Elasticities Elasticities  Using the Raspberry data: log(Q)  0.81 2.4log(P)  1.46log(I ) Price elasticity = -0.24 (Inelastic) Income Chapter 4 elasticity = 1.46 Slide 84 Empirical Estimation of Demand Estimating Estimating Complements Complements and and Substitutes Substitutes log(Q) a  blog(P)  b2 logP2  clog(I )  Substitutes: b2 is positive  Complements: b2 is negative Chapter 4 Slide 85 The Demand for Ready-to-Eat Cereal  What Do You Think? Are Grape Nuts & Spoon Size Shredded Wheat good substitutes? Chapter 4 Slide 86 The Demand for Ready-to-Eat Cereal  Answer Estimated demand for Grape Nuts (GN) log(QGN ) 1.998a  2.085log(PGN)  0.62log(I )  .014log(PSW) Chapter 4  Price elasticity = -2.0  Income elasticity = 0.62  Cross elasticity = 0.14 Slide 87 Summary  Individual 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. Chapter 4 Slide 88 Summary  Two 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. Chapter 4 Slide 89 Summary  Two 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. Chapter 4 Slide 90 Summary  The 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. Chapter 4 Slide 91 Summary  There 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. Chapter 4 Slide 92 End of Chapter 4 Individual and Market Demand