Chapter 4 Individual and Market demand
Chapter 4 Individual and Market Demand
Topics to be Discussed ■| ndividual demand a Income and substitution effects ■ Market demand a Consumer Surplus Chapter 4 Slide 2
Chapter 4 Slide 2 Topics to be Discussed ◼ Individual Demand ◼ Income and Substitution Effects ◼ Market Demand ◼ Consumer Surplus
Topics to be Discussed ■ Network externalities Empirical Estimation of Demand Chapter 4 Slide 3
Chapter 4 Slide 3 Topics to be Discussed ◼ Network Externalities ◼ Empirical Estimation of Demand
Individual demand ■ Price Changes o 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
Chapter 4 Slide 4 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
Effect of a Price Change Clothing (units per month) Assume. =$20 10 Pc=$2 PF=$2,$1,$50 5 D Three separate indifference curves are tangent to each budget line Food (unit 4 per month) hapter 4 Slide 5
Chapter 4 Slide 5 Effect of a Price Change Food (units per month) Clothing (units per month) 4 5 6 U2 U3 A B D U1 4 12 20 Three separate indifference curves are tangent to each budget line. Assume: •I = $20 •PC = $2 •PF = $2, $1, $.50 10
Effect of a Price Change Clothing The price-consumption (units per curve traces out the month) utility maximizing market basket for the various prices for food Price-Consumption Curve 5 D Food (units 41220 per month Chapter 4 Slide 6
Chapter 4 Slide 6 Price-Consumption Curve Effect of a Price Change Food (units per month) Clothing (units per month) 4 5 6 U2 U3 A B D U1 4 12 20 The price-consumption curve traces out the utility maximizing market basket for the various prices for food
Effect of a Price Change Price of food Individual Demand relates $200 the quantity of a good that a consumer will buy to the price of that good $1.00 Demand curve $50 H Food (units 41220 per month Chapter 4 Slide 7
Chapter 4 Slide 7 Effect of a Price Change Demand Curve Individual Demand relates the quantity of a good that a consumer will buy to the price of that good. Food (units per month) Price of Food H E G $2.00 4 12 20 $1.00 $.50
Individual demand The Individual demand curve a 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
Chapter 4 Slide 8 Individual Demand ◼ Two Important Properties of Demand Curves 1) The level of utility that can be attained changes as we move along the curve. The Individual Demand Curve
Individual demand The Individual demand curve a 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
Chapter 4 Slide 9 Individual Demand ◼ 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. The Individual Demand Curve
Effect of a Price Change Price When the price falls: P/Pc MRS also fall of food $200 E: P/PC=2 2=1= MRS . G: P/P=1/2=.5= MRS H:P/P=5/2=.25=MRS $1.00 Demand curve $50 H Food (units 41220 per month Chapter 4 Slide 10
Chapter 4 Slide 10 Effect of a Price Change Food (units per month) Price of Food H E G $2.00 4 12 20 $1.00 $.50 Demand Curve •E: Pf /Pc = 2/2 = 1 = MRS •G: Pf /Pc = 1/2 = .5 = MRS •H:Pf /Pc = .5/2 = .25 = MRS When the price falls: Pf /Pc & MRS also fall