MBMC Demand: The Benefit Side of The Market. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Demand: The Benefit.
Post on 16-Dec-2015
215 Views
Preview:
Transcript
MB MC
Demand: The Benefit Side of The Market
Demand: The Benefit Side of The Market
Chapter 5: Demand: The Benefit Side of the Market Slide 2
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Law of Demand
People do less of what they want to do as the cost of doing it rises
Chapter 5: Demand: The Benefit Side of the Market Slide 3
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Law of Demand
The benefit of an activity equals the highest price we’d be willing to pay to pursue it (i.e., the reservation price).
As the cost of an activity rises and exceeds the reservation price, less of the activity will be pursued.
Chapter 5: Demand: The Benefit Side of the Market Slide 4
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Law of Demand
The Origins of DemandWhat determines “tastes” or “preferences”?
BiologyCulturePeer Influences
Chapter 5: Demand: The Benefit Side of the Market Slide 5
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Law of Demand
Economic NaturalistNeeds vs. Wants
Why does California experience chronic water shortages?
Chapter 5: Demand: The Benefit Side of the Market Slide 6
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
How should we allocate our incomes among the various goods and services that are available?
Chapter 5: Demand: The Benefit Side of the Market Slide 7
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
Measuring Wants: The Concept of UtilityUtility
The satisfaction people derive from their consumption activities
AssumptionPeople allocate their income to maximize their
satisfaction or total utility
Chapter 5: Demand: The Benefit Side of the Market Slide 8
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Sarah’s Total Utility from Ice Cream Consumption
Cone quantity (cones/hour) Total utility (utils/hour)
0 0
1 50
2 90
3 120
4 140
5 150
6 140
How much ice cream should Sarahconsume if the ice cream is “free”?
Chapter 5: Demand: The Benefit Side of the Market Slide 9
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Sarah’s Total Utility from Ice Cream Consumption
Cones/hour
Uti
ls/h
ou
r
1 3 4 5 60 2
150140
120
90
50
Chapter 5: Demand: The Benefit Side of the Market Slide 10
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants Into Demand
What should Sarah do when she gets to the front of the line?
What do you think?Is the time spent in the line relevant to how
many cones to order?
Chapter 5: Demand: The Benefit Side of the Market Slide 11
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Sarah’s Total Utility and Marginal Utility from Ice Cream Consumption
Cone quantity Total utility Marginal utility(cones/hour) (utils/hour) (utils/cone)
0 0
1 50
2 90
3 120
4 140
5 150
6 140
50
40
30
20
10
-10
__
Chapter 5: Demand: The Benefit Side of the Market Slide 12
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Sarah’smarginalutility
Diminishing Marginal Utility
Cones/hour
Uti
ls/c
on
e
1 34.5
01.50.5
43.52.5
2
50
40
30
20
10
Chapter 5: Demand: The Benefit Side of the Market Slide 13
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
The Law of Diminishing Marginal UtilityThe tendency for the additional utility
gained from consuming an additional unit of a good to diminish as consumption increases beyond some point
Chapter 5: Demand: The Benefit Side of the Market Slide 14
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
Allocating A Fixed Income Between Two GoodsAssume
Two goods: Chocolate and vanilla ice creamPrice of chocolate equals $2/pintPrice of vanilla equals $1/pintSarah’s budget = $400/yrCurrently Sarah is consuming 200 pints of
vanilla and 100 pints of chocolate
Chapter 5: Demand: The Benefit Side of the Market Slide 15
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
QuestionIs Sarah maximizing her total utility?
Chapter 5: Demand: The Benefit Side of the Market Slide 16
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Marginal Utility Curves for Two Flavors of Ice Cream (I)
Pints/yr
Mar
gin
al u
tilit
y o
f va
nill
a ic
e cr
eam
(uti
ls/ p
int)
Mar
gin
al u
tilit
y o
f ch
oco
late
ice
crea
m
(uti
ls/ p
int)
Pints/yr
12
200
16
100
Chapter 5: Demand: The Benefit Side of the Market Slide 17
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
Marginal utility vanilla/P$12/1 = 12 utils/$
Marginal utility chocolate/P16/2 = 8 utils/$
Chapter 5: Demand: The Benefit Side of the Market Slide 18
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
If Sarah spends $2 less on chocolate, utils will decline by 16.
If Sarah spends $2 more on vanilla, utils will increase by 24
So…Sarah should buy more vanilla
Chapter 5: Demand: The Benefit Side of the Market Slide 19
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Marginal Utility Curves for Two Flavors of Ice Cream (II)
Pints/yr
Mar
gin
al u
tilit
y o
f va
nill
a ic
e cr
eam
(uti
ls/ p
int)
12
200
8
300
Sarah increases vanillaspending by $100, andMUV/PV = 8/$1 = 8
Chapter 5: Demand: The Benefit Side of the Market Slide 20
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Marginal Utility Curves for Two Flavors of Ice Cream (II)
Mar
gin
al u
tilit
y o
f ch
oco
late
ice
crea
m
(uti
ls/ p
int)
Pints/yr
16
100
24
50
Sarah decreases chocolatespending by $100, andMUC/PC = 24/$2 = 12 >MUV/pV = 8
Chapter 5: Demand: The Benefit Side of the Market Slide 21
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Marginal Utility Curves for Two Flavors of Ice Cream (III)
Pints/yr
Mar
gin
al u
tilit
y o
f va
nill
a ic
e cr
eam
(uti
ls/ p
int)
10
250
1
10
VanillaPrice
Vanilla
MU
Chapter 5: Demand: The Benefit Side of the Market Slide 22
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Marginal Utility Curves for Two Flavors of Ice Cream (III)
Mar
gin
al u
tilit
y o
f ch
oco
late
ice
crea
m
(uti
ls/ p
int)
Pints/yr
20
75
2
20
Chocolate Price
Chocolate
MU
Chapter 5: Demand: The Benefit Side of the Market Slide 23
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
The Rational Spending RuleSpending should be allocated across
goods so that the marginal utility per dollar is the same for each good.
V
V
C
C
P
MU
P
MU
Chapter 5: Demand: The Benefit Side of the Market Slide 24
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
The Rational Spending RuleHow is the rational spending rule related to
the cost-benefit principle?
Chapter 5: Demand: The Benefit Side of the Market Slide 25
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
Income and Substitution Effects RevisitedHow should Sarah respond to a reduction
in the price of chocolate ice cream?
Chapter 5: Demand: The Benefit Side of the Market Slide 26
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Marginal Utility Curves for Two Flavors of Ice Cream (III)
Pints/yr
Mar
gin
al u
tilit
y o
f va
nill
a ic
e cr
eam
(uti
ls/ p
int)
Mar
gin
al u
tilit
y o
f ch
oco
late
ice
crea
m
(uti
ls/ p
int)
Pints/yr
10
250
20
75
1
10
VanillaPrice
Vanilla
MU2
20
Chocolate Price
Chocolate
MU
Chapter 5: Demand: The Benefit Side of the Market Slide 27
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
Assume Budget = $400PC = $2 & PV = $1
QC = 75 & QV = 250
1
10
P
MU
2
20
P
MU
V
V
C
C
Chapter 5: Demand: The Benefit Side of the Market Slide 28
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Translating Wants into Demand
Assume Price of chocolate falls to $1
1
10
P
MU
1
20
P
MU
V
V
C
C
Chapter 5: Demand: The Benefit Side of the Market Slide 29
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Applying theRational Spending Rule
Economic NaturalistWhy do the wealthy in Manhattan live in
smaller houses than the wealthy in Seattle?
Chapter 5: Demand: The Benefit Side of the Market Slide 30
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Applying theRational Spending Rule
Economic NaturalistWhy did people turn to four-cylinder cars in
the 1970s only to shift back to six- and eight-cylinder cars in the 1990s?
Chapter 5: Demand: The Benefit Side of the Market Slide 31
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Applying theRational Spending Rule
Economic NaturalistWhy are automobile engines smaller in
England than in the United States?
Chapter 5: Demand: The Benefit Side of the Market Slide 32
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Applying theRational Spending Rule
The Importance of Income DifferencesWhy are waiting lines longer in poorer
neighborhoods?
Chapter 5: Demand: The Benefit Side of the Market Slide 33
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Individual and Market Demand Curves for Canned Tuna
Pri
ce (
$/ca
n)
Smith’s quantity
1.20
6
1.40
1.60
1.00
.80
.60
.40
.20
0
(cans/week)
2 4 8
Pri
ce (
$/ca
n)
Jones’s quantity
60
(cans/week)
2 4
Smith Jones+
Horizontal Addition
1.20
1.40
1.60
1.00
.80
.60
.40
.20
Chapter 5: Demand: The Benefit Side of the Market Slide 34
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Individual and Market Demand Curves for Canned Tuna
Pri
ce (
$/ca
n)
Total quantity
60
(cans/week)
2 4 8 1210
=
MarketDemandcurve
1.20
1.40
1.60
1.00
.80
.60
.40
.20
Chapter 5: Demand: The Benefit Side of the Market Slide 35
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
The Individual and Market Demand Curves When All Buyers Have Identical Demand Curves
Pri
ce (
$/ca
n)
Quantity
6
6
5
4
3
2
1
0
(cans/month)
2 4 8 1210
D
Quantity
6
6
5
4
3
2
1
0
(1000s of cans/month)
2 4 8 1210
D
Pri
ce (
$/ca
n)
•Each of 1,000 consumers have the same demand•Market Demand = P x number of consumers (1,000)
Chapter 5: Demand: The Benefit Side of the Market Slide 36
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Demand and Consumer Surplus
Consumer SurplusThe difference between a buyer’s
reservation price for a product and the price actually paid
Chapter 5: Demand: The Benefit Side of the Market Slide 37
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Demand
A Market with a “Digital” Demand Curve
Units/day
Mar
gin
al u
tilit
y o
f va
nill
a ic
e cr
eam
(uti
ls/ p
int)
1
1
2
3
4
5
6
7
8
9
10
11
12
2 3 4 5 6 7 8 9 10 11 120
Chapter 5: Demand: The Benefit Side of the Market Slide 38
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Consumer Surplus
Units/day
Mar
gin
al u
tilit
y o
f va
nill
a ic
e cr
eam
(uti
ls/ p
int)
1
1
2
3
4
5
6
7
8
9
10
11
12
2 3 4 5 6 7 8 9 10 11 12
Demand
0
Consumer surplus= $15/day
Chapter 5: Demand: The Benefit Side of the Market Slide 39
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Demand and Consumer Surplus
QuestionHow much do buyers benefit from their
participation in the market for milk?
Chapter 5: Demand: The Benefit Side of the Market Slide 40
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Supply and Demand in the Market for Milk
Quantity (1,000s of gallons/day)
Pri
ce (
$/g
allo
n)
1
.50
1.00
1.50
2.00
2.50
3.00
2 3 4 5 6 7 8 9 10 11 120
S
D
Chapter 5: Demand: The Benefit Side of the Market Slide 41
MB MC
Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.
Consumer Surplus in the Market for Milk
Quantity (1,000s of gallons/day)
Pri
ce (
$/g
allo
n)
1
.50
1.00
1.50
2.00
2.50
3.00
2 3 4 5 6 7 8 9 10 11 120
S
D
Consumer surplus •h = $1/gallon•b = 4,000•Consumer surplus = (1/2)(4,000)(1) = $2,000/day
MB MC
End ofChapterEnd of
Chapter
top related