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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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
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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
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Price Elasticity and Consumer Expenditure (pp. 122-7)
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Consumer Surplus (pp. 128-31) Consumers buy goods because it makes them better off Consumer Surplus measures how much better off they are
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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
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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 $6 worth of surplus Can measure this for each ticket Total surplus is addition of surplus for each ticket purchased
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Consumer Surplus - Example Price ($ 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
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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
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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
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Demand Curve Actual Expenditure
0
1
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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
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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?
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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
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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
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Valuing Cleaner Air (pp. 128-31) Value
2000
A
1000
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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 $1000 per part reduced.
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Value of Cleaner Air (pp. 128-31) A full cost-benefit analysis would include total benefit of cleanup Total benefits would be compared to total costs to determine if the clean up was worthwhile
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Network Externalities Up to this point we have assumed that people’s demands for a good are independent of one another For some goods, one person’s demand also depends on the demands of other people
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Network Externalities If this is the case, a network externality exists Network externalities can be positive or negative
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Network Externalities A positive network externality exists if the quantity of a good demanded by a consumer increases in response to an increase in purchases by other consumers Negative network externalities are just the opposite
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Network Externalities The Bandwagon Effect This is the desire to be in style, to have a good because almost everyone else has it, or to indulge in a fad This is the major objective of marketing and advertising campaigns (e.g. toys, clothing) Positive network externality in which a consumer wishes to possess a good in part because others do
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Positive Network Externality: Bandwagon Effect Price ($ 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
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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
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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 $20
Bandwagon Effect
Pure Price Effect
Quantity
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Network Externalities The Snob Effect If the network externality is negative, a snob effect exists
The snob effect refers to the desire to own exclusive or unique goods The quantity demanded of a “snob” good is higher the fewer the people who own it
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Network Externality: Snob Effect Price ($ 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.
$15,000
D2 Pure Price Effect
D4 D8 2
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Network Externality: Snob Effect Price ($ 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
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