Download Market Demand (pp. 122-7)

Market Demand (pp. 122-7)
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
The sum of all the individual demand curves
in the market
©2005 Pearson Education, Inc.
Chapter 4
1
Determining the Market Demand
Curve (pp. 122-7)
Price
Mr. A
Ms. B
Mr. C
Market
Demand
1
6
10
16
32
2
4
8
13
25
3
2
6
10
18
4
0
4
7
11
5
0
2
4
6
©2005 Pearson Education, Inc.
Chapter 4
2
Summing to Obtain a
Market Demand Curve (pp. 122-7)
Price
5
The market demand
curve is obtained by
summing the consumer’s
demand curves
4
3
Market Demand
2
1
0
DA
5
©2005 Pearson Education, Inc.
DB
10
DC
15
Chapter 4
20
25
30
Quantity
3
The Aggregate Demand for
Wheat: Ex. 4.3 (pp. 125-6)
The demand for US wheat is comprised
of two components:
Domestic demand (by US consumers))
Export demand (by foreign consumers)
Total demand for wheat can be obtained
by aggregating these two demands
©2005 Pearson Education, Inc.
Chapter 4
4
The Aggregate Demand for
Wheat: Ex. 4.3 (pp. 125-6)
The domestic demand for wheat is given
by the equation for the year 2002:
QDD = 1465 - 88P
The export demand for wheat is given by
the equation:
QDE = 1344 - 138P
©2005 Pearson Education, Inc.
Chapter 4
5
The Aggregate Demand for
Wheat: Ex. 4.3 (pp. 125-6)
To obtain the world demand curve, we
set the left side of each demand equation
equal to the quantity of wheat. We then
add the right side of equations, obtaining
QDD+QDE =(1465 - 88P) + (1344 - 138P)
= 2809 - 226P
©2005 Pearson Education, Inc.
Chapter 4
6
The Aggregate Demand for
Wheat: Ex. 4.3 (pp. 125-6)
Price
Total world demand is
the horizontal sum of the
domestic demand AB and
export demand CD.
The kinked line AEF shows
the aggregate (market)demand
for US wheat.
18
A
16
10
C
Above C, export demand is
zero, so domestic demand =
total demand = AE segment
E
Total Demand
Export
Demand
Domestic
Demand
D
B
0
©2005 Pearson Education, Inc.
Chapter 4
F
Wheat
7
Market Demand (pp. 122-7)
From this analysis one can see two
important points:
The market demand will shift to the right as
more consumers enter the market
Ex. Expanding markets for the elders’ goods
& services in aging societies.
Factors that influence the demands of many
consumers will also affect the market
demand
©2005 Pearson Education, Inc.
Chapter 4
8
Market Demand (pp. 122-7)
Aggregation is important to be able to
discuss regarding demand for different
groups
Households with children
Consumers aged 20 – 30, etc.
In Japan, we have had a fewer children than
20 or 30 years ago. As a result, such
industries as toy makers, kindergartens are
facing shrinking demand for their products or
services.
©2005 Pearson Education, Inc.
Chapter 4
9
Market Demand (pp. 122-7)
Price Elasticity of Demand
Measures the percentage change in the
quantity demanded resulting from a percent
change in price
% ΔQ ΔQ/Q ΔQ P
=
EP =
=
% ΔP ΔP/P ΔP Q
©2005 Pearson Education, Inc.
Chapter 4
10
Price Elasticity of Demand
(pp. 122-7)
Price-inelastic Demand
Ep is less than 1 in absolute value
Quantity demanded is relatively
unresponsive to a change in price
|%ΔQ| < |%ΔP|
μ Total expenditure (PĻQ) increases when
price increases
©2005 Pearson Education, Inc.
Chapter 4
11
Price Elasticity of Demand
(pp. 122-7)
Price-elastic Demand
Ep is greater than than 1 in absolute value
Quantity demanded is relatively responsive
to a change in price
|%ΔQ| > |%ΔP|
μ Total expenditure (PĻQ) decreases when
price increases
©2005 Pearson Education, Inc.
Chapter 4
12
Price Elasticity and
Consumer Expenditure (pp. 122-7)
©2005 Pearson Education, Inc.
Chapter 4
13
Consumer Surplus (pp. 128-31)
Consumers buy goods because it makes
them better off
Consumer Surplus measures how much
better off they are
©2005 Pearson Education, Inc.
Chapter 4
14
Consumer Surplus (pp. 128-31)
Consumer Surplus
The difference between the maximum
amount a consumer is willing to pay for a
good and the amount actually paid
Can you calculate consumer surplus from
the demand curve? Yes
©2005 Pearson Education, Inc.
Chapter 4
15
Consumer Surplus - Example
(pp. 128-31)
Student wants to buy concert tickets
Demand curve tells us willingness to pay
for each concert ticket
1st ticket worth $20 but price is $14 so
student generates $6 worth of surplus
Can measure this for each ticket
Total surplus is addition of surplus for each
ticket purchased
©2005 Pearson Education, Inc.
Chapter 4
16
Consumer Surplus - Example
Price
($ per
ticket)
(pp. 128-31)
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
Consumer Surplus
6 + 5 + 4 + 3 + 2 + 1 = 21
Market Price
14
13
0
Will not buy more than 7
because additional
surplus is negative
1
©2005 Pearson Education, Inc.
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3
4
Chapter 4
5
6
Rock Concert Tickets
17
Consumer Surplus (pp. 128-31)
The stepladder demand curve can be
converted into a straight-line demand
curve by making the units of the good
smaller
Consumer surplus is the area under the
demand curve and above the price
©2005 Pearson Education, Inc.
Chapter 4
18
Consumer Surplus (pp. 128-31)
Price
($ per
ticket)
Consumer Surplus
for the Market Demand
20
19
CS
18
= 1/2Ļ($20$14)Ļ(6,500)
17
16
15
=$19,500
Consumer
Surplus
Market Price
14
13
Demand Curve
Actual
Expenditure
0
1
©2005 Pearson Education, Inc.
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3
4
Chapter 4
5
6
Rock Concert Tickets
19
Applying Consumer Surplus
(pp. 128-31)
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
©2005 Pearson Education, Inc.
Chapter 4
20
Applying Consumer Surplus –
An Example (pp. 128-31)
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
to include tighter automobile emmissons
controls
Question: Were the benefits of cleaning up
the air worth the costs?
©2005 Pearson Education, Inc.
Chapter 4
21
The Value of Clean Air (pp. 128-31)
Empirical data determined estimates for
the demand for clean air
No market exists for clean air, but can
see people are willing to pay for it
Ex: People pay more to buy houses where
the air is clean
©2005 Pearson Education, Inc.
Chapter 4
22
The Value of Cleaner Air (pp. 128-31)
Using these empirical estimates, we can
measure people’s consumer surplus for
pollution reduction from the demand
curve
©2005 Pearson Education, Inc.
Chapter 4
23
Valuing Cleaner Air (pp. 128-31)
Value
2000
A
1000
0
©2005 Pearson Education, Inc.
5
The shaded area represents the
consumer surplus generated
when air pollution is
reduced by 5 parts per 100
million of nitrogen oxide at
a cost of $1000 per
part reduced.
10
Chapter 4
NOX (pphm)
Pollution Reduction
24
Value of Cleaner Air (pp. 128-31)
A full cost-benefit analysis would include
total benefit of cleanup
Total benefits would be compared to total
costs to determine if the clean up was
worthwhile
©2005 Pearson Education, Inc.
Chapter 4
25
Network Externalities
Up to this point we have assumed that
people’s demands for a good are
independent of one another
For some goods, one person’s demand
also depends on the demands of other
people
©2005 Pearson Education, Inc.
Chapter 4
26
Network Externalities
If this is the case, a network externality
exists
Network externalities can be positive or
negative
©2005 Pearson Education, Inc.
Chapter 4
27
Network Externalities
A positive network externality exists if the
quantity of a good demanded by a
consumer increases in response to an
increase in purchases by other
consumers
Negative network externalities are just
the opposite
©2005 Pearson Education, Inc.
Chapter 4
28
Network Externalities
The Bandwagon Effect
This is the desire to be in style, to have a
good because almost everyone else has it,
or to indulge in a fad
This is the major objective of marketing and
advertising campaigns (e.g. toys, clothing)
Positive network externality in which a
consumer wishes to possess a good in part
because others do
©2005 Pearson Education, Inc.
Chapter 4
29
Positive Network
Externality: Bandwagon Effect
Price
($ per
unit)
D20
D40 D60 D80 D100
When consumers believe more
people have purchased the
product, the demand curve shifts
further to the the right.
Quantity
20
©2005 Pearson Education, Inc.
40
60
Chapter 4
80
100
(thousands per month)
30
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
Quantity
20
©2005 Pearson Education, Inc.
40
60
Chapter 4
80
100
(thousands per month)
31
Positive Network
Externality: Bandwagon Effect
Price
($ per
unit)
D20
D40 D60 D80 D100
$30
Suppose
But as more
the price
people
fallsbuy
fromthe
$30
good,
to $20.
it becomes
If there
to own it and
werestylish
no bandwagon
effect,
the quantity
demanded
quantity
demanded
would
only increase
increases
tofurther.
48,000
Demand
$20
Bandwagon
Effect
Pure Price
Effect
Quantity
20
©2005 Pearson Education, Inc.
40 48 60
Chapter 4
80
100
(thousands per month)
32
Network Externalities
The Snob Effect
If the network externality is negative, a snob
effect exists
The snob effect refers to the desire to
own exclusive or unique goods
The quantity demanded of a “snob” good
is higher the fewer the people who own it
©2005 Pearson Education, Inc.
Chapter 4
33
Network Externality: Snob Effect
Price
($ per
unit)
Demand
$30,000
Originally demand is D2,
when consumers think 2,000
people have bought a good.
However, if consumers think 4,000
people have bought the good,
demand shifts from D2 to D6 and its
snob value has been reduced.
$15,000
D2
Pure Price Effect
D4
D8
2
©2005 Pearson Education, Inc.
4
6
8
Chapter 4
D6
Quantity
14
(thousands
per month)
34
Network Externality: Snob Effect
Price
($ 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
Pure Price Effect
D4
D8
2
©2005 Pearson Education, Inc.
4
6
8
Chapter 4
D6
Quantity
14
(thousands
per month)
35