Consumers Equilibrium & Market demand with graphs

1. Consumer
Equilibrium
and Market
Demand
Chapter 4

2. Chapter 4
Topics of Discussion
• Conditions for Consumer Equilibrium
• Changes in Equilibrium
Changes in product price
Changes in other demand determinants
• The Law of Demand
• Tastes and Preferences
Composition of the population
Attitudes toward nutrition or health
– food safety
– lifestyles
–technological forces
–advertising
• Consumer Surplus

3. Theory of Consumer Economic
Behavior
1. Indifference Curve
Consumer Preferences
2. Budget Line
Affordability
Consumer Equilibrium
Leads to Demand Curve for the Product

4. Consumer Equilibrium
T
H
T
H
P
P
H
T
MU
MU
MRS 





5. Measurement and
Interpretation of
Consumer Equilibrium

6. Consumer Equilibrium
Must find the point where utility is
maximized subject to the budget constraint.
This situation occurs where:
MUHAMBURGERS MUTACOS
PHAMBURGERS PTACOS
=
Page 54

7. Consumer Equilibrium
Must find the point where utility is
maximized subject to the budget constraint.
This situation occurs where:
MUHAMBURGERS MUTACOS
PHAMBURGERS PTACOS
=
In other words, the marginal utility derived from the
last dollar spent on each good is identical. This
relationship can be expanded to include all goods and
services purchased by the consumer.
Page 54

8. Page 54
Utility is maximized by
buying 5 tacos @ $0.50
and 2 hamburgers @ $1.25
given a budget constraint
of $5.00 per week….
Consumer Equilibrium

9. Page 54
Points B and D
exceed the budget
Consumer Equilibrium

10. Page 54
Point C does
not maximize
utility…
Consumer Equilibrium

11. Page 55
Effects of Changes in Price of the Product
Let’s look at the
impact of three
separate price levels
($5.00, $1.25 and $1.00)
on this consumer’s
weekly purchases of
hamburgers

12. Page 55
Effects of Changes in Price of the Product
A price decrease of
hamburger prices to
$1.00 would cause
Carl to increase his
weekly purchases
of hamburgers from
2 to 3.

13. Page 55
Effects of Changes in Price of the Product
If the price instead
increases to $5.00,
Carl would only want
one-half a hamburger
per week (would you
believe 1 hamburger
every other week?)

14. Page 55
Effects of Changes in Price of the Product
Line CAB forms the basis of
a consumer demand
schedule, showing
how the consumer
would respond to
changes in the price
of hamburgers.

15. Demand Schedule for Hamburgers
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
0 1 2 3
Quantity of hamburgers
Price
of
hamburgers
A B
C
D

16. Three “Laws” in
Economics So Far
(1) Law of Diminishing Marginal Utility
(2) Law of Demand
(3) Engel’s Law

17. Scatter Plot Analysis of Demand
for Steak

20. Original
equilibrium
Page 57
Effects of Changes in Available Income

21. Original
equilibrium
Both hamburgers and
tacos are “normal” goods
as income increased from
$5 to $6 per week.
Page 57
Effects of Changes in Available Income

22. Original
equilibrium
Page 57
Effects of Changes in Available Income
But tacos became an
“inferior” good however
when income increased
to $8 per week.
As income increased , taco
consumption fell ….

23. Engel curve for hamburgers Engel curve for tacos
Normal good as the
budget increases from
$5 to $8
Inferior good as the
budget increases from
$6 to $8
Page 58

24. Measurement and
Interpretation of
Market Demand

25. The market demand curve for a particular product can
be seen as a horizontal summation of the demand schedules
for all the consumers in the market.
At a price of $1.50, Paula would buy 2 hamburgers per week
while Beth would buy one. Therefore, the market demand is
equal to 3 hamburgers!
Page 59
+ =

26. Factors Influencing Demand
1. Own Price
2. Other Prices
3. Income/Wealth
4. Tastes and Preferences
Advertising
Health and Nutrition
Food Safety
Population

27. Some Important Jargon
When discussing events in the market place,
economists use specific terms to distinguish
between movement along a demand curve
and a shift in a demand curve.

28. Some Important Jargon
When discussing events in the market place,
economists use specific terms to distinguish
between movement along a demand curve
and a shift in a demand curve.
A movement along a demand curve is
referred to as a change in the quantity
demanded.

29. Some Important Jargon
When discussing events in the market place,
economists use specific terms to distinguish
between movement along a demand curve
and a shift in a demand curve.
A movement along a demand curve is
referred to as a change in the quantity
demanded.
A shift in the demand curve, on the other
hand, is referred to as a change in demand.

30. Movement from
point A to C is
called a change
in demand…
Page 61

31. Movement from
point A to B is
called a change
in the quantity
demanded…
Page 61

32. Concept of Consumer Surplus
An important extension of the market demand curve
is the concept of consumer surplus, or economic well
being consumers derive in the market.
The demand curve reveals the willingness of consumers
to pay a certain price for a corresponding quantity.

33. Concept of Consumer Surplus
An important extension of the market demand curve
is the concept of consumer surplus, or economic well
being consumers derive in the market.
The demand curve reveals the willingness of consumers
to pay a certain price for a corresponding quantity.
They are willing to pay a higher price for a lesser
quantity, but do not have to given the level of supply
coming onto the market in a given period. Thus, they
realize a “savings”.

34. Concept of Consumer Surplus
An important extension of the market demand curve
is the concept of consumer surplus, or economic well
being consumers derive in the market.
The demand curve reveals the willingness of consumers
to pay a certain price for a corresponding quantity.
They are willing to pay a higher price for a lesser
quantity, but do not have to given the level of supply
coming onto the market in a given period. Thus, they
realize a “savings”.
We will use this concept later in Chapter 8 when we
discuss market equilibrium.

35. F G
Area ABC is the consumer
surplus if price is $6. The
demand curve implies they
were willing to pay $10 for
the 1st unit, $9 for the second
unit, etc. But they only had
to pay $6 each for all 5 units!
Page 63

36. F G
Area DACE is the
gain in consumer
surplus if the price
falls to $5
Page 63