2. 2
The consumer is maximizing utility at every point along the
demand curve
As the price of X falls, it causes the consumer to move down
and to the right along the demand curve as utility increases in that
direction.
The demand curve is also the “willingness to pay” curve – and
willingness to pay for an additional unit of X falls as more X is
consumed.
Individual Demand Curve
3. 3
The Market Demand Function
The Market Demand Function tells us
that the quantity of a good all
consumers in the market are willing to
buy is a function of various factors.
Defined:
4. 4
Market Demand as the Sum of Individual Demands
DCatherine
0 12
10 11
9
1 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Catherine’s demand
DNicholas
0 1 2 3 4 5 6 7
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Nicholas’s demand
+ =
DMarket
0 18
2 4 6 8 10 12 14 16
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Market demand
5. 5
The Market Demand Curve
The Market Demand Curve plots the
aggregate quantity of a good that consumers
are willing to buy at different prices,
holding constant other demand drivers such
as prices of other goods, consumer income,
quality.
Defined:
6. 6
The Law of Demand
The Law of Demand states that the
quantity of a good demanded decreases
when the price of this good increases.
Defined:
7. 7
Demand Curve Rule
A move along the demand curve for a
good can only be triggered by a change in
the price of that good.
Any change in another factor that affects
the consumers’ willingness to pay for the
good results in a shift in the demand
curve for the good.
Defined:
8. 8
Shifts of the Demand Curve
The Demand Curve shifts when factors other than own
price change
If the change increases the willingness of consumers to
acquire the good, the demand curve shifts right
If the change decreases the willingness of consumers to
acquire the good, the demand curve shifts left
9. 9
The Demand for Cars
We always graph P on vertical axis and Q on horizontal axis, but
we write demand as Q as a function of P… If P is written as
function of Q, it is called the inverse demand.
Markets defined by commodity, geography, time.
10. 10
Market Supply
Tells us that the quantity of a good
supplied by all producers in the market
depends on various factors
Plots the aggregate quantity of a good that
producers are willing to sell at different
prices.
11. 11
Market Supply as the Sum of Individual Supplies
SBen
0 1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Ben’s supply
SJerry
0 1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Jerry’s supply
+ =
SMarket
0 18
2 4 6 8 10121416
Quantity of
Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Market supply
12. 12
The Law of Supply
The Law of Supply states that the
quantity of a good offered increases when
the price of this good increases.
Defined:
13. 13
Supply Curve Rule
A move along the supply curve for a good
can only be triggered by a change in the
price of that good.
Any change in another factor that affects
the producers’ willingness to offer for the
good results in a shift in the supply curve
for the good.
Defined:
14. 14
The Law of Supply
The Supply Curve shifts when factors other than own price change
If the change increases the willingness of producers to
offer the good at the same price, the supply curve shifts right
If the change decreases the willingness of producers to
offer the good at the same price, the supply curve shifts left
15. 15
Market Equilibrium
• Market Equilibrium
• is a price such that, at this price, the quantities demanded and
supplied are the same.
• is a point at which there is no tendency for the market price
to change as long as exogenous variables remain unchanged.
Demand and supply curves intersect at equilibrium
16. 16
Example: Market Equilibrium for Cranberries
Qd = 500 – 4p
Qs = -100 + 2p
p = price of cranberries (dollars per barrel)
Q = demand or supply in millions of barrels per year
The equilibrium price of cranberries is calculated by equating demand to supply:
Qd = Qs … or…
500 – 4p = -100 + 2p
…solving
p* = $100
Plug equilibrium price into either demand or supply to get equilibrium quantity:
Q* = 500 – 4(100) = 100 units
18. 18
Excess Demand/Supply
Excess Demand: A situation in which the quantity demanded
at a given price exceeds the quantity supplied.
Excess Supply: A situation in which the quantity supplied at a
given price exceeds the quantity demanded.
If there is no excess supply or excess demand, there is no
pressure for prices to change and thus there is equilibrium.
When a change in an exogenous variable causes the demand
curve or the supply curve to shift, the equilibrium shifts as
well.
19. 19
Excess Demand/Supply
Quantity (billions of bushels per year)
Price (dollars
per bushel)
E
3.00
4.00
5.00
8 9 11 13 14
D
S
Excess supply
when price is $5
Excess demand
when price is $3
22. 22
Decide whether the event shifts the supply curve, the
demand curve, or, in some cases, both curves.
Decide whether the curve shifts to the right or to the
left.
Use the supply-and-demand diagram
• Compare the initial and the new equilibrium.
• Effects on equilibrium price and quantity.
Three Steps
23. 23
Consumer Surplus
• The individual’s demand curve can be seen as the
individual’s willingness to pay curve.
• On the other hand, the individual must only
actually pay the market price for (all) the units
consumed.
• Consumer Surplus is the difference between what
the consumer is willing to pay and what the
consumer actually pays.
24. 24
Consumer Surplus
Definition: The net economic benefit to the
consumer due to a purchase (i.e. the willingness to
pay of the consumer net of the actual expenditure on
the good) is called consumer surplus.
The area under an ordinary demand curve and
above the market price provides a measure of
consumer surplus
27. The Demand Schedule and the Demand Curve
$100
80
70
50
Price of Albums
The table shows the demand schedule for the buyers. The graph shows the
corresponding demand curve. The height of the demand curve reflects buyers’
willingness to pay.
0 4
3
1 2
Quantity of Albums
John’s willingness to pay
Paul’s willingness to pay
George’s willingness to pay
Ringo’s willingness to pay
Demand
28. Measuring Consumer Surplus with the Demand Curve
$100
80
70
50
Price of
Albums
In panel (a), the price of the good is $80, and the consumer surplus is $20. In panel
(b), the price of the good is $70, and the consumer surplus is $40.
0 4
3
1 2
Quantity of Albums
John’s consumer
surplus ($20)
Demand
(a) Price = $80
$100
80
70
50
Price of
Albums
0 4
3
1 2
Quantity of Albums
John’s consumer
surplus ($30)
(b) Price = $70
Paul’s consumer
surplus ($10)
Total consumer
surplus ($40)
Demand
29. Demand Curve
• The demand curve measures how many people would
want to by the commodity at any particular price
• The demand curve slopes down; as the price of the
commodity decreases more people will be willing to
buy.
• If there are many people and their reservation prices
differ only slightly from person to person, the demand
curve would slope smoothly downward
30. How the Price Affects Consumer Surplus
30
Price
Initial price P1, Quantity Q1, Consumer surplus is the area ABC.
New lower price P2, Quantity Q2,
Consumer surplus rises and becomes ADF.
Increase : 1) from initial buyers BDEC and 2)from new buyers CEF
0 Quantity
(a) Consumer Surplus at Price P1 (b) Consumer Surplus at Price P2
Demand
Q1
Consumer
surplus
B
C
A
Price
0 Quantity
Demand
Initial
consumer
surplus
A
Q2
B
D
C
E
F
Additional consumer surplus
to initial consumers
Consumer surplus
to new consumers
Q1
P2
P1
P1
31. Consumer Surplus
Consumer Surplus and Demand
Consumer Surplus Generalized
For the market as a whole, consumer
surplus is measured by the area under the
demand curve and above the line
representing the purchase price of the
good.
Here, the consumer surplus is given by
the yellow-shaded triangle and is equal to
1/2 × ($20 − $14) × 6500 = $19,500.
Applying Consumer Surplus
When added over many individuals, it measures the aggregate
benefit that consumers obtain from buying goods in a market.
33. • If one consumer's demand for a good changes with the number of
other consumers who buy the good, there are network externalities.
Network Externalities
34. • Bandwagon effect: A positive network externality that refers to the
increase in each consumer’s demand for a good as more consumers
buy the good.
• Snob effect: A negative network externality that refers to the
decrease in each consumer’s demand as more consumers buy the good.
Network Externalities
35. PX
D30
D60
Market Demand
•
• •
A
B C
20
10
60
Pure
Price
Effect
Bandwagon Effect
Bandwagon Effect:
• (increased quantity
demanded when more
consumers purchase)
Bandwagon effect
36. X (units)
PX
Market Demand
•
•
A
C
900 D1000
D1300
•
B
Pure Price Effect
Snob Effect
Snob Effect:
• (decreased quantity
demanded when more
consumers purchase)
Snob Effect
