Transcript Chapter 4

Chapter 4
Individual and market demand
What is individual demand and
market demand?
• Individual demand is the demand of one
individual consumer in the market for a good
or service.
• Market demand is the total combined demand
of all consumers in the market for a good or
service.
Derivation of Market Demand from
Individual Demand
Derivation of Market Demand from Individual
Demand – Horizontal Summation
Price
Consumer 1
Consumer 2
Market Demand
3
0
0
0
2
1
0
1
1
2
1
3
0
3
2
5
Problem 1:
Solution 1
Problem 2
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•
•
•
Q1 = 100 – 5P
Q2 = 160 - 10P
Q3 = 200 – 10P
Find the Market Quantity equation from these
3 individual demand quantity equations? Then
draw the graph for all the lines?
Solution 2
• Qt = Q1 + Q2 + Q3
• Qt = 100 – 5P + 160 - 10P + 200 – 10P
• Qt= 460 - 23P
Problem 3
• Use the following 2 individual demand
equations to find the market demand
equation:
• Qh = 300 – 5P
• Qs = 100 – 10P
• Draw the graph for all 3 equations.
Solution 3
• If P > 10
– Then Qt = Qh = 300 – 5P
If P =< 10
Then Qt = Qh + Qs = 400 – 15P
Problem 4
• Domestic demand for wheat is given by the
equation: QDD = 1430 - 55P
• Export demand is given by: QDE = 1470 - 70P
• Where P is the price in Dollars.
• Find the Market Demand equations for US
wheat?
• Draw the graph for all 3 lines.
Solution 4
Substitution and Income effects
• A fall in the price of a good has two effects:
• Consumers will tend to buy more of the good that has
become cheaper and less of those goods that are now
relatively more expensive. This response to a change in the
relative prices of goods is called the substitution effect.
• Because one of the goods is now cheaper, consumers enjoy
an increase in real purchasing power. They are better off
because they can buy the same amount of the good for less
money, and thus have money left over for additional
purchases. The change in demand resulting from this
change in real purchasing power is called the income effect.
• Total Effect = Substitution Effect + Income Effect
Example of Total effects
Example of Substitution effect
Example of Income effect
Example of Substitution and Income
effect
Inferior vs. Normal vs. Giffen goods
• An Inferior good is a good that decreases in demand
when consumer income rises.
• Normal goods are those for which consumers' demand
increases when their income increases.
• A special type of inferior good may exist known as the
Giffen good, which would disobey the "law of
demand". Quite simply, when the price of a Giffen
good increases, the demand for that good increases.
This would have to be a good that is such a large
proportion of a person or market's consumption that
the income effect of a price increase would produce,
effectively, more demand.
Example of a Giffen good
• It was noted by Sir Robert Giffen III that in
Ireland during the 19th century there was a
rise in the price of bread. The poor people
were forced to reduce their consumption of
meat and expensive items like eggs etc. Now
bread being still the cheapest food, so they
started consuming more of it though its price
was rising. This phenomenon is often
described as "Giffen's Paradox".