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Econ 201 Lecture 1.5 Consumer Demand Theory 1-9-2009 Overview • Marginal Value or Marginal Willingness-toPay • First Law of Demand • Total WTP, Total Amount Paid, Consumer Surplus First Law of Demand • First law of demand, – The lower a good’s price it, the greater the quantity demanded (by an individual or the market) • Demand – Entire schedule: quantity demanded at various prices • Quantity demanded – The amount demanded at a given price From the Demand Side • First Law of Demand – What Does Law Of Demand Mean? – all other factors being equal, as the price of a good or service increases, consumer demand for the good will decrease and vice versa. – http://www.investopedia.com/ter ms/l/lawofdemand.asp A Demand Example Price Individual's Demand Curve Qty Demanded $10.00 1 $9.00 2 $8.00 3 $7.00 4 $6.00 5 $5.00 6 $4.00 7 $3.00 8 $2.00 9 $1.00 10 Price per unit $12.00 $10.00 $8.00 $6.00 Price $4.00 $2.00 $0.00 1 2 3 4 5 6 7 Quantity Demanded 8 9 10 Consumer’s Marginal Value • Some basic definitions – Total Willingness-to-pay: “value in use” • Maximum total amount you would be willing to pay for x units of the good than go without? – Equals the area under the demand curve up to x units Individual's Demand Curve Total Value of 4 uni Price per unit $12.00 $10.00 $8.00 $6.00 Price $4.00 $2.00 $0.00 1 2 3 4 5 6 7 Quantity Demanded 8 9 10 All the things a demand curve tells you about value of the good Demand Curve is Also Marginal Value and Avg Revenue Average Price (price per unit) Demand Curve $12 $10 $8 $6 $4 $2 $0 CS Amount Paid 1 2 3 4 5 6 7 Quantity Demanded Total WTP = CS + Amt Paid 8 9 10 In Class Example Avg P*Qd TV(Q-1)+MV(Q) Tot Val- Tot Paid Avg Pric Qty Dem Tot Amt Paid Tot Value (WTP) Marg Val Cons Surp $10 1 $10 $10 $10 $0 $9 2 $18 $19 $9 $1 $8 3 $24 $27 $8 $3 $7 4 $28 $34 $7 $6 $6 5 $30 $40 $6 $10 $5 6 $30 $45 $5 $15 $4 7 $28 $49 $4 $21 $3 8 $24 $52 $3 $28 $2 9 $18 $54 $2 $36 $1 10 $10 $55 $1 $45 Also = Avg Rev Also = MV(Q) TV(Q)-TV(Q-1) Total and Marginal Value Price Qty Demanded Amt Paid Marginal Value Total Value Price x Qty Dem $10.00 1 $10.00 $10.00 $10.00 $9.00 2 $18.00 $9.00 $19.00 $8.00 3 $24.00 $8.00 $27.00 $7.00 4 $28.00 $7.00 $34.00 $6.00 5 $30.00 $6.00 $40.00 $5.00 6 $30.00 $5.00 $45.00 $4.00 7 $28.00 $4.00 $49.00 $3.00 8 $24.00 $3.00 $52.00 $2.00 9 $18.00 $2.00 $54.00 $1.00 10 $10.00 $1.00 $55.00 Area under Demand Difference in TV(3)-TV(2) MV is also equal to price paid Buy Rules • Consumer will buy a good as long as: – Total Willingness-to-Pay > Amount Paid • There is always some consumer surplus, or incentive for consumer • Consumer Surplus ≡ Difference () between maximum amount that you are willing-to-pay and what you have to pay – CS ≡ Total WTP – Average Price x Qty Purhased • Consumer will choose how much to buy (quantity demanded): – Marginal Value >= price paid for the last unit • For Perfect Competition: price same for all units -> price paid for last unit = average price What Does a Demand Curve Tell You? • A Demand Curve is also – A Marginal Value Curve • Tells you what the consumer’s marginal value of the last (incremental/additional) unit is – An Average Revenue Curve • Tells you what the average price needs to be in order to sell x units