Demand analysis • Firms sell goods/services to buyers – Consumers (individuals) : utility – Firms : make profits • Willingness to pay: maximum price buyer will pay for a good – Point of indifference between buying and not buying – Lower price always preferred by buyer
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Demand analysis
• Firms sell goods/services to buyers– Consumers (individuals) : utility– Firms : make profits
• Willingness to pay: maximum price buyer will pay for a good– Point of indifference between buying and not
buying– Lower price always preferred by buyer
• Willingness to pay is determined by– Buyer’s tastes or needs– Income and wealth
• Demand curve for an individual buyer– Willingness to pay for
different quantities of the good
– Or, quantity demanded at each price
– Usually downward sloping: lower willingness to pay for additional units
• Lower utility of consumption for consumers
• Lower productivity of resources for firms
• Shifts in demand curve
• Market demand– Sum of individual demand curves– Aggregate quantity demanded at each price– Arrays individual buyers in order of willingness to pay– Identical goods? Product differentiation?
• Market segments / Price discrimination– Different segments willing to pay different
prices– Consumer surplus– Can firms exploit this?
• Feasible?• Fair?
• Price sensitivity of demand– Slope of market demand curve– Flat demand curve: very price sensitive: Elastic
• Goods with good substitutes• Luxury items ?
– Steep demand curve: less sensitive: Inelastic• Necessities
• Time-frame: easier to find substitutes over long run
• Demand curves– Accept as given?– Seek to modify?
Supply analysis
• Supply curve– How much the firm will sell at each price– Assumption: price-taking firm
• Time-frame of supply decision– Long run: compete in the market at all?– Short run: how much to produce & sell?