Willingness to Pay - is the maximum amount a person would be willing to pay, sacrifice or exchange for a good Consumer Surplus – the value to a consumer of consumption of a good, minus the price paid Demand slide 1
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Demand
Willingness to Pay - is the maximum amount a person would be willing to pay, sacrifice or exchange for a good
Consumer Surplus – the value to a consumer of consumption of a good, minus the price paid
slide 1
Demand
Diminishing marginal value – the value of last unit consumed declines as the number consumed rises
slide 2
Demand slide 3
MODEL OF DEMANDThe model of demand is an attempt to
explain the amount demanded of any good or service.
DEMAND DEFINED
The amount of a good or service a consumer wants to buy, and is able to buy per unit time.
Demand slide 4
THE DEMAND CURVE
The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand.
The DEPENDENT variable is the quantity demanded.
The INDEPENDENT variable is the good’s own price.
Demand slide 5
THE LAW OF DEMAND
The Law of Demand says that a decrease in a good’s own price will result in an increase in the amount demanded, holding constant all the other determinants of demand.
The Law of Demand says that demand curves are negatively sloped.
Demand slide 6
A DEMAND CURVE
A demand curve must look like this, i.e., be negatively sloped.
own price
quantity demanded
demand
Market for tacos
Demand slide 7
The demand curve means:You pick a price, such a p0, and the demand curve shows
how much is demanded.own price
quantity demanded
demand
p0
Q0
Market for tacos
Demand slide 8
What if the price of tacos were less than p0?
How do you show the effect on demand?
Go to hidden slide
Demand slide 10
Suppose people want to buy more of a good when incomes rise, holding constant all other factors affecting demand, including the good’s own price.
own price
quantity of soda
demand @ I = $1000
Market for soda
How does this affect the demand curve?
$1/can
Demand slide 12
Normal and inferior goods defined
Normal good: When an increase in income causes an increase in demand.
Inferior good: When an increase in income causes a decrease in demand.
Necessities of Life: Food, Water, ClothingNormal Goods: Television, Radio/CD Player, Mobile PhoneInferior Goods: Bargain food (prices cut down because they've passed their "sell-by" date, a second hand/used television, clothing from a charity store.
Demand slide 13
Substitutes defined
Substitutes: Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other.
Thus, an increase in the price of pizza would increase the demand for spaghetti if the goods were substitutes.
Demand slide 14
Complements defined
Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other.
Thus, an increase in the price of pizza would decrease the demand for soda if the goods were complements.
Demand slide 15
DEMAND SUMMARY
Demand is a function of own-price, income, prices of other goods, and tastes.
The demand curve shows demand as a function of a good's own price, all else constant.
Changes in own-price show up as movements along a demand curve.
Changes in income, prices of substitutes and complements, and tastes show up as shifts in the demand curve.
Supply slide 16
MODEL OF SUPPLYThe model of supply is an attempt to explain
the amount supplied of any good or service.
SUPPLY DEFINEDThe amount of a good or service a firm wants
to sell, and is able to sell per unit time.
Supply slide 17
YOU COULD WRITE THE MODEL THIS WAY:
The supply function for tacos
QS(tacos) = S(Ptacos, Ptaco shells, Plettuce, Plabor, Ptomatoes, . . . ,technology, taxes &
subsidies)
Supply slide 18
THE SUPPLY CURVE
The supply curve for any good shows the quantity supplied at each price, holding constant all other determinants of supply.
The DEPENDENT variable is the quantity supplied.
The INDEPENDENT variable is the good’s own price.
Supply slide 19
THE LAW OF SUPPLY
The Law of Supply says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply.
The Law of Supply says that supply curves are positively sloped.
Supply slide 20
A SUPPLY CURVE
A supply curve must look like this, i.e., be positively sloped.
own price
quantity supplied
supply
TACO MARKET
Supply slide 21
The supply curve means:
You pick a price, such a p0, and the supply curve shows how much is supplied.
own price
quantity supplied
supply
p0
Q0TACO MARKET
Supply slide 22
own price
quantity supplied
supply
p0
Q0
TACO MARKET
If the price of tacos rises, how is the supply curve affected?
Supply slide 24
Other factors affecting supply
The question here is how to show the effects of changes in input prices, technology, and taxes.
The answer, of course, is that changes in input prices, technology, or taxes cause the supply curve to shift.
Supply slide 25
Changes in input prices
Consider the supply of pizza, and suppose the price of flour, a crucial input to pizza, falls. Pizza firms now find that pizza production is more profitable than it was before, and they respond to this be increasing the supply of pizza.
Supply slide 26
The price of hops falls from $300 per ton to $100 per
ton.
own price
quantity
supply @ hops price of $300/ton
BEER MARKET
How will this affect the supply curve for beer?
Go to hidden slide
Supply slide 28
Change in technology
An improvement in technology makes it possible to produce a level of output with fewer inputs than before.
Because this lowers the cost of production, profits rise, and firms will try to supply more.
Supply slide 29
own price
quantity
supply @ old technology
PIZZA MARKET
Suppose pizza technology improves.
How does this affectthe supply curve for pizza?
Go to hidden slide
Supply slide 31
price
Q
S (no tax)
How would you suspect an excise tax affects the supply of a good?
Go to hidden slide
Supply slide 33
Supply summary
Supply is a function of own price, input prices, and technology.
The supply curve shows supply as a function of own price, all else constant.
Changes in a good’s own price show up as movements along a supply curve.
Changes in input prices, technology, or taxes show up as shifts in the supply curve.
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