Download Unit 6 - The Demand Curve

Unit 6
The Demand Curve
Economics - 6th year
EURSC
2007/2008
Economics - 6th year (EURSC)
Unit 6
2007/2008
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Unit 6
2007/2008
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Contents
1
Demand and Price
2
Factors affecting Demand
3
The consumer surplus
Economics - 6th year (EURSC)
Demand and Price
In most cases (except for Giffen goods), the quantity demanded of
that good increases as price decreases.
Demand for books per year
Say X=books, Y=other goods
Books are normal goods for the individual considered
Starting price and income: Px = 10, Py = 20, M = 100
Price changes to Px = 15 (ceteris paribus)
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2007/2008
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Other
12
20
16
12
A
8
B
4
0
2
4
6
8
10
Books
Price
30
The Demand Curve
25
20
B
15
A
10
5
0
2
4
6
8
10
Books
Demand and Price
The Demand Function
Consider the space price of books versus books demanded.
For each price we plot the corresponding optima (A,B)
The result is the INDIVIDUAL DEMAND CURVE (or FUNCTION)
Read horizontally: the demand curve shows how much would the
individual would consume at each price (given her resources).
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Individual and Market Demand
The Market Demand is the sum of the individual demands at each
price for a group of agents.
How to obtain Market Demand for Oranges
Price
0.50
1.00
1.50
2.00
2.50
A
3.50
2.00
1.50
0.80
0.20
B
2.00
1.60
1.30
0.60
0.00
Economics - 6th year (EURSC)
C
4.25
4.00
3.20
2.70
1.90
Market
Demand
9.75
7.60
6.00
4.10
2.10
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Factors affecting Demand
Demand and Income
Income affects demand
Normal good: higher income, higher demand. Individual is ready to
pay more for the same consumption.
Inferior good: higher income, lower demand. Individual wants to
pay less for the same consumption.
Income induces SHIFTS the demand curve
Normal good: higher income, DC shifts northeast
Inferior good: higher income, DC shifts southwest
Economics - 6th year (EURSC)
Unit 6
2007/2008
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Other
12
20
16
12
A
8
B
4
0
2
4
6
8
10
Books
8
10
Books
Price
30
25
20
15
A
10
B
5
0
2
4
6
Factors affecting Demand
Demand and Price of Other Goods
Markets of different goods are related each other. Changes in one
market Y may affect another market X.
X,Y can be:
Complements: ↑ Py → demand of X falls (shifts southwest)
Substitutes: ↑ Py → demand of X increases (shifts northeast)
Independent: ↑ Py → demand of X is not affected (does not move)
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Factors affecting Demand
Demand and Price of Other Goods
Milk, Corn Flakes and Porridge
Milk and corn flakes are complements. An increase in the price of milk
will likely reduce the demand of milk, and thus, the demand of corn
flakes (will move southwest). But corn flakes and porridge are
substitutes. An increase in the price of corn will shift the demand for
porridge northeast.
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Unit 6
2007/2008
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Factors affecting Demand
Demand and Other Factors
Changes in preferences: changes in tastes of people
A preference for the good: demand shifts northeast
A dislike for the good: demand shifts southwest
Changes in legislation: ex. law against drunk drivers and
alcoholimeters.
Finally, population grotwh always increases market demand.
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Factors affecting Demand
Summary
Quantity demanded (Qx ) changes with own price (Px ). Also, we
have seen that shifts in the demand curve can be caused by:
Changes in income (M)
Changes in cross-prices (Py )
Changes in tastes or legislation (T )
Population growth (only for market demand) (T )
Demand curve can be expressed as a function.
Qx = f (Px ; M, Py , T )
Example: Qx =
Economics - 6th year (EURSC)
M+T
Py
− 3Px
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The Consumer Surplus
Let’s read the demand function “vertically”
For each quantity the demand curve shows the maximum the
individual would pay for the last unit (recall principle #3)
Demand of Big Brother TV show
First minute of BB TV show is worth 50 cents.
Having seen 59 minutes, minute 60 of BB TV show is worth 20
cents.
Having seen one hour and a half of BB TV show, this BB TV fan
would pay nothing for minute 100.
Economics - 6th year (EURSC)
Unit 6
2007/2008
Price
60
Demand of BB TV show in minutes
50
40
30
20
10
0
20
40
60
80
100
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The Consumer Surplus
Assume the BB TV fan contracts an hour of BB TV show per 12
EUR (i.e., 20 cents per min).
Benefit is the difference between “willingness to pay” and real
payment.
For the first minute, his benefit is 50-20=30 cents.
For the 20th. minute, benefit is 40-20=20 cents.
Total benefit is the CS area: called the CONSUMER SURPLUS.
Economics - 6th year (EURSC)
Unit 6
2007/2008
Price
60
Demand of BB TV show in minutes
50
40
30
CS
20
10
0
20
40
60
80
100
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The Consumer Surplus
The Paradox of Value
Why diamonds have such a big price despite being so useless?
They are scarce: thus, people is willing to pay a high price for
them (left part of demand function for diamonds)
Why water has a low price despite being so useful?
Water is more abundant, thus people pays a low price for the last
unit (right part of the demand function for water)
Thus, consumer surplus in the diamonds market is small but very
big in the water market.
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2007/2008
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