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AGEC 603 Derived Demand for Land Individual Demand • Based on consumer choice • Utility theory and budget constraint • Utility theory • Utility is the satisfaction one gets from consuming a good or service • Budget constraint – how much you have to spend Marginal Utility • Change in utility derived from a change in consumption of a particular good holding other goods constant • Law of Diminishing Marginal Utility - as consumption per unit of time increases, marginal utility decreases • Examples – M&Ms – Texan Steak - Amarillo 1 Indifference / Isoutility Curves Bundle of goods Negative slope Nonintersecting Everywhere dense Convex to the origin B1 B2 L1 L2 Land units Consuming B1L1 provides the same utility as consuming B2L2 Bundles of goods 1 2 3 4 5 6 7 8 Indifference Curves Which bundle would you prefer … bundle M or bundle B? The answer is that this we would be indifferent because they give us the same utility. The ultimate choice will depend on the prices of these two products. M B 1 2 3 4 5 6 Land Units 7 8 Indifference Curves Bundle of goods 1 2 3 4 5 6 7 8 Which bundle would you prefer more…bundle C or bundle N? C 1 2 3 N 4 5 6 7 Land Units We would prefer bundle N over bundle C because it gives us more utility or satisfaction. The question is whether we can afford to buy bundle N! 8 2 Marginal Rate of Substitution • The rate at which the consumer is willing to substitute one good for another and maintain a constant utility level • MRS of land for bundle constant bundle land with utility • Notice - rise over run = the slope for a specific segment for a nonlinear curves Marginal Rate of Substitution Bundle of goods 3 4 5 6 7 8 -1 • MRSland for bundle going from 2 to 3 land units bundle _ 1 1 land 1 1 2 1 2 3 4 5 6 7 8 1 Land Units This means the consumer is willing to give up 1 bundle unit in exchange for one land unit! Marginal Rate of Substitution Bundle of goods 3 4 5 6 7 8 1 • MRSbundle for land going from 2 to 3 bundle units bundle 1 -0.5 land -2 1 2 1 2 3 4 5 6 -2 Land Units 7 8 This means the consumer is willing to give up 2 land units for one additional unit of bundle of goods! 3 Marginal Rate of Substitution MRS MU land bundle land MU bundle • Why? – Utility must be constant – What you give up with one, you must gain with the other! Budget Constraint • Represents the amount of income available for spending on the consumption bundles • Example land / bundle budget Pland x Qland + Pbundle x Qbundle Budget where Pland and Pbundle represent the price of land and the bundle of goods while Qland and Qbunlde represent the quantities you purchase during the time period. Budget Constraint – Graph Bundle of goods 1 2 3 4 5 6 7 8 Income = $200 Prices = $40 / unit bundle and $20 / unit land Apply all income to bundle Budget Constraint 1 2 3 4 5 6 Land 7 8 9 Apply all income to land 10 11 4 Bundle Price Decreases by 1/2 Bundle of goods 4 5 6 7 8 9 10 Bundle price decreases by 1/2 Original price budget constraint After price change budget constraint 1 2 3 Apply all income to land 1 2 3 4 5 6 Land 7 8 9 10 11 Bundle Price Increases by 2 Bundle of goods 4 5 6 7 8 9 10 Original price budget constraint Bundle price decreases by 1/2 budget constraint 1 2 3 Bundle price doubles budget constraint 1 2 3 4 5 6 Land 7 8 9 10 11 Original price budget constraint Land price doubles Land price decreases by 1/2 1 2 3 Bundle of goods 4 5 6 7 8 9 10 Land Price Changes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Land 5 Steaks (lbs) consumed per week 1 2 3 4 5 6 7 8 Income Changes Original Budget Line Budget Line at increased income Budget Line at ½ income Note: parallel shifts 1 2 3 4 5 6 7 8 9 10 11 Dozen corn ears consumed per week Objective - Maximize Utility Bundle of goods 3 4 5 6 7 8 Indifference Curve – below budget constraint Can increase utility by moving outward Not Optimal 1 2 Point Indifference Curve is Tangent to Budget Constraint Feasible – spends all budget Maximizes Utility – highest curve obtainable 1 2 3 4 Indifference Curves and points above the budget Constraint exceeds your budget - not feasible 5 6 7 8 9 10 11 Land Units Slope Budget Constraint Using x and y intercept points to calculate slope land = 0, bundle = 5 and land = 10 and bundle = 0 Bundle of good 3 4 5 6 7 8 Slope = rise / run = (5-0)/(0-10) = -0.5 These points obtained Income / price of bundle = 5 and Income / price of land = 10 I I 0) Pbunlde Pbundle P land I I Pbundle (0 ) Pland Pland 8 9 10 11 1 2 ( 1 2 3 4 5 6 7 Land Units 6 Tangency Conditions • Slope of indifference curve = slope of budget constraint • Slope of indifference curve = MRS = - MUland / MUbundle • Slope of budget constraint = -Pland / Pbundle • Therefore, MRS MU land P land MU bundle Pbundle MU land MU bundle Pland Pbundle Consumer Equilibrium • Point where utility is maximized subject to the budget constraint occurs at MUland Pland = MUbundle Pbundle • In other words, the marginal utility derived from the last dollar spent on each good is identical. This can be expanded to include all goods and services purchased by the consumer. Individual Demand Curve Bundle of goods 3 4 5 6 7 8 Original Price = $20 / unit Consumption bundle 2.5 bundle units and 5 units land 1 2 What if price decreases to $15? What happens to budget constraint? 1 2 3 4 5 6 7 Land units 8 9 10 11 7 Bundle of goods 3 4 5 6 7 8 9 10 11 Land Price Decreases New x-intercept New equilibrium Same Why 1 2 = 2.75 bundle and 6 land Why an increase in bundle and increase in land? 1 2 3 4 5 6 7 Land Units 8 9 10 11 12 13 14 Land Price Increases Bundle of goods 3 4 5 6 7 8 9 10 11 New y-intercept same Why? New equilibrium 1 2 = 3.125 bundle and 1.5 land Why an decrease in land and increase in bundle? 1 2 3 4 5 6 7 Land Units 8 9 10 11 12 13 14 Individual Demand Curve - Land Demand Schedule Price Quantity Pincrease 1.5 Po 5 Pdecrease 6 8 Market Demand Curve - Land + = The market demand curve is the horizontal summation of the demand schedules for all the consumers in the market. Demand Curve Jargon - Review • Specific terms to distinguish between movement along a demand curve and a shift in a demand curve • Change in the quantity demanded is a movement along a demand curve - Cause • Change in demand is a shift in the demand curve - Causes World Population and Demand • Population one of the most important factors in determining demand for land • Trends Price • Changing characteristics • Future outlook P3 • Density S P2 Increasing population leads to 1) increasing price and 2) increasing land use assuming no change in supply curve P1 D L1 L2 L3 Land Quantity 9 World Population Source: http://one-simple-idea.com/Environment1.htm World Population Year Population 1 AD 200 million Change 1650 500 million 1804 1 billion Doubled in 313 years 1927 2 billion Doubled in 118 years 1960 3 billion Increased by 1 billion in 38 years 1999 6 billion Doubled in 39 years 2013 7.1 billion 2015 7.2 billion Source U.S. Census Bureau http://geography.about.com/od/obtainpopulationdata/a/worldpopulation.htm World Population Distribution http://en.wikipedia.org/wiki/File:World_population_distribution.svg 10 World Population by Country http://www.nationsonline.org/oneworld/world_population.htm Urban Areas >= million inhabitants in 2006 http://en.wikipedia.org/wiki/World_population World Population Density (people/km2) • http://www.worldometers.info/world-population/#region 11 http://www.census.gov/population/international/data/idb/worldgrgraph.php World Population Growth Is Almost Entirely Concentrated in the World's Poorer Countries. World Population (in Billions): 1950-2050 Source: United Nations Population Division, World Population Prospects, The 2008 Revision. © 2009 Population Reference Bureau. All rights reserved. www.prb.org 12 Population Density Projections • Year Population Area (sq. km.) Density (persons per sq. km.) Acres / person 1950 2,557,628,654 132,061,547 19.4 14.10 1960 3,042,828,380 132,061,547 23.0 12.16 1970 3,712,338,708 132,061,547 28.1 9.86 1980 4,450,929,761 132,061,547 33.7 8.20 1990 5,287,869,228 132,061,547 40.0 6.88 2000 6,090,319,399 132,061,547 46.1 5.98 2010 6,866,054,281 132,061,547 52.0 5.31 2020 7,631,071,690 132,061,547 57.8 4.80 2030 8,315,758,309 132,061,547 63.0 4.40 2040 8,896,844,579 132,061,547 67. 4.10 2050 9,376,416,975 132,061,547 71.0 3.80 http://www.census.gov/population/international/data/idb/informationGateway.php Global Hunger Index • The 2013 (GHI) ranks 88 countries using three indicators: – The proportion of people who are calorie deficient, or undernourished – The prevalence of underweight in children under the age of five – The under-five mortality rate • Takes into account the special vulnerability of children to nutritional deprivation • Ratings from 0 (best) to 100 (worst). Global Hunger Index • Countries are rated from 0 (best) to 100 (worst). • Overall GHI scores improved from 18.7 in the 1990 to 15.2 in the 2008. • Sub-Saharan Africa and South Asia have the worst scores on the 2008 GHI. Policy Research Institute, http://www.ifpri.org 13 2008 Global Hunger Index GHI-Winners and Losers 1990 - 2008 Global Hunger Index http://www.ifpri.org/ghi/2013 Policy Research Institute, http://www.ifpri.org 14 U.S. Population http://www.census.gov/popest/data/maps/11maps.html U.S. Population 15 U.S. Population U.S. Population Components of Population Change One birth every 8 seconds One death every 12 seconds One international migrant (net) every 40 seconds Net gain of one person every 17 seconds http://www.census.gov/popclock/embed.php?component=counter 10 Most Populous States Population, Pop. per sq. mi., 2013 2013 California 38,332,521 246.1 Texas 26,448,193 101.2 New York 19,651,127 417.0 Florida 19,552,860 364.6 Illinois 12,882,135 232.0 Pennsylvania 12,773,801 285.5 Ohio 11,570,808 283.2 Georgia 9,992,167 173.7 Michigan 9,895,622 175.0 North Carolina 9,848,060 202.0 State 2030 Poplation 46,444,861 33,317,744 28,685,769 19,477,429 13,432,892 12,768,184 12,227,739 10,712,397 12,017,838 10,694,172 http://www.census.gov/popclock/#populous-counties 16 Fastest Growing Cities 2010- 2011 Percent Increase New Orleans 4.9 Round Rock, 2. 4.8 Texas 3. Austin, Texas 3.8 4. Plano, Texas 3.8 5. McKinney, Texas 3.8 6. Frisco, Texas 3.8 7. Denton, Texas 3.4 8. Denver 3.3 9. Cary, N.C. 3.2 10. Raleigh, N.C. 3.1 11. Alexandria, Va. 3.1 12. Tampa, Fla. 3.1 13. McAllen, Texas 3.0 14. Carrollton, Texas 3.0 15. Atlanta 3.0 http://www.census.gov/newsroom/releases/archives/population/cb12-117.html 1. 2011 Total Population 360,740 104,664 820,611 269,776 136,067 121,387 117,187 619,968 139,633 416,468 144,301 346,037 133,742 122,640 432,427 Fastest Growing States 2010- 2011 The 10 Fastest Growing States from April 1, 2010, to July 1, 2011 The 10 States with the Largest Numeric Increase from April 1, 2010, to July 1, 2011 Percent change 1. District of Columbia 2.70 2. Texas 3. Utah 4. Numeric change 1. Texas 529,000 2.10 2. California 438,000 1.93 3. Florida 256,000 Alaska 1.76 4. Georgia 128,000 5. Colorado 1.74 5. North Carolina 121,000 6. North Dakota 1.69 6. Washington 105,000 7. Washington 1.57 7. Virginia 96,000 8. Arizona 1.42 8. Arizona 90,000 9. Florida 1.36 9. Colorado 88,000 10. Georgia 1.32 10. New York 87,000 http://www.census.gov/newsroom/releases/archives/population/cb11-215.html U.S. Population Movement http://www.census.gov/dataviz/visualizations/051 17 U.S. Population Projections Table 1. Projections of the Population and Components of Change for the United States: 2015 to 2060 Year Population 2015 2020 2025 2030 2035 2040 2045 2050 321,363 333,896 346,407 358,471 369,662 380,016 389,934 399,803 Numeric Percent Natural change change increase 2,471 2,521 2,478 2,364 2,159 2,022 1,969 1,985 0.77 0.76 0.72 0.66 0.59 0.53 0.51 0.50 1,677 1,612 1,453 1,225 1,002 848 778 781 Vital events Births Deaths 4,290 4,380 4,413 4,433 4,505 4,612 4,729 4,820 Net international migration1 2,613 2,768 2,959 3,208 3,503 3,765 3,951 4,038 794 909 1,024 1,139 1,156 1,174 1,191 1,204 thousands http://www.census.gov/population/projections/data/national/2012/summarytables.html 50.0 Interim Projections: Percent Change in Population by Region of the United States, 2000 to 2030 45.8 42.9 45.0 40.0 35.0 30.0 29.2 25.0 20.0 15.0 10.0 7.6 9.5 5.0 0.0 United States Northeast Midwest South West Source: U.S. Census Bureau, Population Division, Interim State Population Projections, 2005 Texas Population Projections Low – zero migration High – 2000-2010 migration rate http://txsdc.utsa.edu/ 18 Texas Population Projections Growth rates vary by year and area http://txsdc.utsa.edu/ Changing Demographics Aging Population 19 Changing Race Make-up Changing Demographics Mean Commute travel times Year Minutes 1980 21.7 1990 22.4 2000 25.5 2009 25.1 Back to Demand Theory • How does above fit into our simple theoretical aggregated demand – Changing demographic • Aging – usually lower disposable income • Work at home – lower travel expenses – increase income to spend elsewhere – Change in taste and preferences • Change in indifference curve • Only time will tell? 20 Changing Income and Utility Max Bundle of goods Increase in budget constraint move equilibrium Increase in income increase budget constraint Land Units Changing Income Land Price Increase in demand D new D original Land Units World GDP – Increase - Projected 21 U.S. & Texas Income Non Ag Land Resource Needs • Increasing Population – mineral and energy needs increasing • Urbanization • Increased incomes – increase demand for land • Increased incomes – increase in recreational / leisure activities • All increasing demand for land • Changing taste and preferences Competition between Land Uses • Highest and best use • Conflicts of interest arise – Many land uses are not compatible with each other – Owners have different objectives – Conflicts of interest between owners and society 22