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Chapter 3
Individual Demand
Curves
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Demand Functions
• Knowing a person’s preferences and all the
economic forces that affect choices allows a
prediction of how much of each good a person
would choose in the face of scarcity
• Summarizes this information in a demand
function: a representation of how the quantity
demanded depends on prices, income, and
preferences.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Demand Function
Quantity of X demanded  d x ( PX , PY , I ; preferences){3.1}
• Three elements determine quantity demanded:
– Prices of X and Y
– Income (I)
– Person’s preferences for X and Y.
• Preferences appear to the right of semicolon assume that preferences do not change during
analysis (i.e. it is static)
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Changes in Income
• When income increases and prices remain
the same, the quantity of each good
purchased might increase.
• Shown in Figure 3-1 where an increase in
income shows as a shift of budget line
outward from I1 to I2 to I3.
• Slope of budget lines remain the same
because prices have not changed .
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-1: Effect of Increasing Income
on the Quantities of X and Y Chosen
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-1: Effect of Increasing Income
on the Quantities of X and Y Chosen
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-1: Effect of Increasing Income
on Quantities of X and Y Chosen
Quantity of Y
per week
Y3
Y2
U3
U2
Y1
U1
I1
0
I2
I3
X1 X2 X3
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
Changes in Income
• Response to increased income: quantity of
X purchased increases from X1 to X2 and
X3 while the quantity purchased of Y also
increases from Y1 to Y2 to Y3.
• Income increases allow more
consumption, and are reflected in an
outward shift in the budget constraint.
Allows an increase in overall utility.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Normal Goods & Inferior Goods
• Normal good: bought in greater quantities
as income increases
• Inferior good: bought in smaller quantities
as income increases.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-2: Indifference Curve Map
Showing Inferiority
Quantity of Y
per week
Y1
0
U1
Z1
I1
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of Z
per week
FIGURE 3-2: Indifference Curve Map
Showing Inferiority
Quantity of Y
per week
Y2
U2
Y1
0
Z2 Z1
U1
I1
I2
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of Z
per week
FIGURE 3-2: Indifference Curve Map
Showing Inferiority
Quantity of Y
per week
Y3
U3
Y2
U2
Y1
0
Z3 Z2 Z1
U1
I1
I2
I3
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of Z
per week
Changes in a Good’s Price
• Change in the price of one good causes
both slope and the intercept of the budget
line to change.
• Change in one good’s price creates a new
utility-maximizing choice on another
indifference curve with a different MRS.
• Change in quantity demanded of good
with price change
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Substitution Effect
• Part of the change in the quantity demanded
for other goods is caused by the substitution
of one good for another: called substitution
effect
• Movement along an indifference curve
• Consumption has to change to equate MRS
to the new price ratio of the two goods.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Income Effect
• Price change creates difference in real
purchasing power; consumers move to a
new indifference curve consistent with
their new purchasing power
• Part of the change in the quantity
demanded is caused by the change in real
income: called income effect.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Substitution and Income Effects
from a Fall in Price
• Figure 3-3: when the price of good X falls,
the budget line rotates out from the
unchanged Y axis, such that the X
intercept lies farther out - the consumer
can now buy more X with lower price.
• Flatter slope means that relative price of X
to Y (PX/PY) has fallen.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-3: Income and
Substitution Effects of a Fall in Price
Quantity of Y
per week
Y*
U1
0
X*
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
FIGURE 3-3: Income and
Substitution Effects of a Fall in Price
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-3: Income and
Substitution Effects of a Fall in Price
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Figure 3-4: Relative Size of
Substitution Effects
Right Shoes
Shell
.
A,B
U1
I
I
I’
I’
U1
BP
Left Shoes
(a) Small Substitution
’
Effect
(b) Large Substitution Effect
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Substitution and Income Effects from
an Increase in Price
• Increase in PX will shift budget line in toward
origin, as in Figure 3-5.
• Substitution effect, holding “real” income
constant: move on U2 from X*, Y* to point B
• Because a higher price decreases purchasing
power, movement from B to X**, Y** is the
income effect
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-5: Income and Substitution
Effects of an Increase in Price
Quantity of Y
per week
U2
New budget constraint
Y*
Old budget constraint
0
X*
Quantity of X
per week
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-5: Income and Substitution
Effects of an Increase in Price
Quantity of Y
per week
U2
U1
B
New budget constraint
Y*
Old budget constraint
0
XB
X*
Substitution effect
Quantity of X
per week
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-5: Income and Substitution
Effects of an Increase in Price
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Substitution and Income Effects for a
Normal Good: Summary
• Figures 3-3 and 3-5 show that substitution
and income effects work in the same
direction with a normal good.
• When the price falls, both substitution and
income effects result in more being
purchased.
• When price increases, both substitution and
income effects result in less being purchased.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Substitution and Income Effects for a
Normal Good: Summary
• These effects provide a rationale for
downward sloping demand curves.
• Also help to determine steepness of
demand curve
• If either substitution or income effects are
large, the change in quantity demanded
will be large with a given price change.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Substitution and Income Effects for
Inferior Goods
• With an inferior good, the substitution and
income effects work in opposite directions.
• Substitution effect results in decreased
consumption for price increases and
increased consumption for price
decreases.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-6: Income and Substitution
Effects for Inferior Good
Quantity of Y
per week
Y*
U2
Old budget constraint
0
X*
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
Substitution and Income Effects for
Inferior Goods
• For inferior goods, the income effect results in an
increased consumption for a price increase, and
decreased consumption for a price decrease.
• Figure 3-6 shows income and substitution effects for
an increase in PX.
• Substitution effect, holding real income constant,
appears as a move from X*, Y* to point B both on U2.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-6: Income and Substitution
Effects for Inferior Good
Quantity of Y
per week
B
New budget constraint
Y*
U2
Old budget constraint
Y**
0
X*
U1
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
FIGURE 3-6: Income and Substitution
Effects for Inferior Good
Quantity of Y
per week
B
New budget constraint
Y*
U2
Old budget constraint
Y**
0
X**
X*
U1
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
Substitution and Income Effects:
Inferior Goods
• Income effect reflects reduced purchasing
power due to a price increase.
• X is an inferior good: decreased income
results in increased consumption of X shown by a move from point B on U1 to a
new utility maximizing point X**, Y** on U1.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Substitution and Income Effects
for Inferior Goods
• Since X** is less than X*, X price increase
results in a decreased consumption of X.
• Decreased consumption happens because
the substitution effect, in this example, is
bigger than the income effect.
• Thus, if the substitution effect dominates,
the demand curve is negatively sloped.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Giffen’s Paradox
• If the income effect of price change for an
inferior good is strong enough, the quantity
demanded may change in same direction as
the price change.
• A situation in which an increase in a good’s
price, leads people to consume more of the
good is called Giffen’s paradox.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
The Lump Sum Principle
• “Lump-sum principle” holds that taxes
imposed on general purchasing power will
have smaller welfare costs than will taxes
imposed on a narrow selection of
commodities.
• Consider Figure 3-7: an individual initially
has I euros to spend, and chooses to
consume X* and Y*, yielding U3 utility.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-7: The Lump-Sum
Principle
Quantity of Y
I
Y*
U3
X*
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
The Lump Sum Principle
• A tax on only good X raises its price,
resulting in a budget constraint I*, and
consumption reduced to X1, Y1 and utility
level U1.
• A general income tax that generates the
same total tax revenue is represented by
the budget constraint I** that goes though
X1, Y1.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-7: The Lump-Sum
Principle
Quantity of Y
I
Y1
Y*
Y2
I’
U3
U1
X1
X*
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
FIGURE 3-7: The Lump-Sum
Principle
Quantity of Y
I
Y1
Y*
Y2
I’
I”
U3
U2
U1
X1
X2 X*
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
The Lump Sum Principle
• Intuitive explanation of lump-sum principle: a
single-commodity tax affects consumers in two
ways:
– Reduces their purchasing power,
– Directs consumption away from the good being taxed.
• The lump-sum tax only has the first of these two
effects.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Changes in the Price of Another
Good
• In a two-good economy, when the price of
one good changes, it affects the demand
for the other good.
• Figure 3-3: an increase in the price of X (a
normal good) caused both an income and
substitution effect that caused a reduction
in the quantity demanded of X.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Changes in the Price of Another Good
• In addition, the substitution effect caused
the demand to decrease for good Y as the
consumer substituted good X for good Y.
• To offset, the purchasing power increase
brought about by a price decrease, causes
an increase in the demand for good Y
(also a normal good).
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Changes in the Price of Another Good
• In this case, the income effect had a dominant
effect on good Y - consumption of Y increased
due to the decrease in X’s price.
• With flatter indifference curves as shown in
Figure 3-8, the situation reverses.
• Decrease in X’s price causes a decrease in the
consumption of good Y, as before.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-8: Effect on the Demand for Good
Y of a Decrease in the Price of Good X
Quantity of Y
per week
Old budget constraint
Y*
U1
0
X*
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
FIGURE 3-8: Effect on the Demand for Good
Y of a Decrease in the Price of Good X
Quantity of Y
per week
Old budget constraint
A
Y*
B
New budget constraint
U2
U1
0
X*
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
FIGURE 3-8: Effect on the Demand for Good
Y of a Decrease in the Price of Good X
Quantity of Y
per week
Old budget constraint
A
Y*
Y**
B
C
New budget constraint
U2
U1
0
X*
X**
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Quantity of X
per week
Changes in the Price of Another Good –
Substitutes & Complements
• Here, the income effect is much smaller
than the substitution effect, so the
consumer ends up consuming less of
good Y at Y** after a decrease in X’s price.
• Thus, the effect of a change in the price of
one good has an ambiguous effect on
demand for the other good.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Construction of Individual Demand
Curves
• Individual demand curve: is a graphic
representation between the price of a good and
the quantity demanded by a consumer, holding
all other factors (preferences, prices of other
goods, and income) constant
• Demand curves limit the study to the
relationship between the quantity demanded
and changes in the good’s price - a single good
world
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Construction of Individual Demand
Curves
• Panel a of Figure 3-9: an individual’s
indifference curve map drawn using three
different budget constraints - Px decreases
• Decreasing prices: P’X, P”X, and P’’’X
respectively
• Individual’s utility maximizing choices of
quantity of X: X’, X’, and X’’’ respectively
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-9: Construction of Individual’s
Demand Curve
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-9: Individual’s Demand Curve
Quantity of Y
per week
Budget constraint for P’ X
Budget constraint for P’’ X
U2
U1
0
X’
X”
X’”
Quantity of X
per week
(a) Individual ’s indifference curve map
Price
P’X
P’’X
0
X’
X”
(b) Demand curve
Quantity of X
per week
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-9: Individual’s Demand Curve
Quantity of Y
per week
Budget constraint for P’ X
Budget constraint for P’’ X
Budget constraint for P’’’X
U2
U1
0
X’
X”
U3
X’”
Quantity of X
per week
(a) Individual ’s indifference curve map
Price
P9
X
P0
X
PX
0
X’
X”
X’”
(b) Demand curve
Quantity of X
per week
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-9: Construction of an
Individual’s Demand Curve
Quantity of Y
per week
Budget constraint for P’ X
Budget constraint for P’’ X
Budget constraint for P’’’X
U2
U1
0
X’
X”
U3
X’”
Quantity of X
per week
(a) Individual ’s indifference curve map
Price
P9
X
P0
X
PX
d
0
X’
X”
X’”
X
(b) Demand curve
Quantity of X
per week
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Constructing Individual Demand Curves
• Three choices show that the quantity
of X demanded, increases as PX falls.
• Panel b shows how we can use three
price and quantity choices to
construct a demand curve.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Constructing Individual Demand Curves
• PX appears on the vertical axis; QdX shown
on the horizontal axis.
• Demand curve (dX) is downward sloping:
when PX falls, QdX increases.
• This result follows from the substitution and
income effects (as shown in ch. 2).
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Shape of the Demand Curve
• If good X has close substitutes, the
increase in its price will cause a large
decrease in the quantity demanded: the
substitution effect will be large.
– Demand curve for a type of breakfast cereal
will likely be relatively flat due to the strong
substitution effect.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Shape of the Demand Curve
• If good X has few substitutes, the
substitution effect of a price increase or
decrease will be small, and the demand
curve will be relatively steep.
– Water – a good with few substitutes.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Shape of the Demand Curve
• Food as a category has no substitutes;
might be thought that no change in
consumption would occur with a price
increase.
• Food constitutes a large part of individual’s
budget: price changes may cause
relatively larger effects on quantity
demanded due to income effect.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Shifts in an Individual’s Demand
Curve
• When one variable that had been held constant
(price of another good, income or preferences)
changes, the entire demand curve shifts.
• Figure 3-10 shows the kinds of shifts that might
take place.
• If X is a normal good and income increases,
then demand increases as shown in Panel a.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-10: Shifts in Individual’s
Demand Curve
PX
PX
P1
PX
P1
P1
0
X1
(a)
X2
X
0
X1 X2
X
0
(b)
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
X2
X1
(c)
X
FIGURE 3-10: Shifts in Individual’s
Demand Curve
PX
PX
P1
PX
P1
P1
0
X1
(a)
X2
X
0
X1 X2
X
0
(b)
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
X2
X1
(c)
X
Shifts in Individual’s Demand Curve
• If X and Y are substitutes and PY
increases, dX increases: as shown in
Panel b.
• Alternatively, if X and Y are complements,
PY increase will cause dX to decrease: as
shown in Panel c.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Shifts in Individual’s Demand Curve
• Preference changes can also shift
demand curves.
• Panel b could represent an increased
preference for cold drinks when a sudden
hot spell occurs.
• Increased environmental consciousness
during the 1980s and 1990s increased the
demand for recycling and for organic food.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Be Careful in Using Terminology:
Essential Distinctions
• A movement downward along a stationary
demand curve in response to a fall in price is
called an increase in quantity demanded,
while a rise in the price of the good results in
a decrease in quantity demanded.
• A rightward shift in a demand curve is called
an increase in demand, while a leftward
shift is a decrease in demand.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Consumer Surplus
• Fig. 3-11 shows demand curve for T-shirts.
• At PT of €11, the individual chooses to buy
ten T-shirts.
• In other words, the individual is willing and
able to pay €11 for the tenth T-shirt.
• With a PT of €9, the individual buys fifteen
T-shirts; the implicit value of the fifteenth
shirt being only €9.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Consumer Surplus
• Because a good is usually sold at a single market
price, people choose to buy additional units of the
good up to the point at which their marginal
valuation equals the good’s price (from chapter 2).
• Figure 3-11, PT= €7: the individual will buy twenty
shirts because the twentieth T-shirt is worth
precisely €7.
• A person will not buy the twenty-first T-shirt,
because its worth is less than €7.
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Graphical Illustration of Consumer Surplus
• Graphically, consumer surplus given
by the area below the demand curve
and above the market price.
• Figure 3-11: total consumer surplus is
given by area AEB (€80).
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-11: Consumer Surplus
from T-Shirt Demand Price (€/shirt)
Price (PT= €/shirt)
15 A
11
9
E
B
d
10
15
20
Quantity (shirts)
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
Consumer Surplus and Utility
• Figure 3-12: shows an individual willing to
pay BC for the right to consume T-shirts,
rather than spending I only on other
goods.
• Would need to be compensated by AB in
other goods to maintain utility at U1
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning
FIGURE 3-12: Consumer Surplus
and Utility
Price (€/shirt)
A
B
C
E
U1
I
U0
I’
Quantity (shirts)
20
Use with Intermediate Microeconomics
by Walter Nicholson, Christopher Snyder, Peter Luke and Michael Wood
ISBN 9781844806294 © 2008 Cengage Learning