Transcript Chapter 1

Consumer
Equilibrium
and Market
Demand
Chapter 4
Discussion Topics
Conditions for consumer equilibrium
Changes in equilibrium
The law of demand
Tastes and preferences
Consumer surplus
Measurement and
Interpretation of
Consumer Equilibrium
Consumer Equilibrium
Must find the point where where utility is
maximized subject to the budget constraint.
This occurs where:
MUHAMBURGERS
PHAMBURGERS
=
MUTACOS
PTACOS
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Consumer Equilibrium
Must find the point where where utility is
maximized subject to the budget constraint.
This occurs where:
MUHAMBURGERS
PHAMBURGERS
=
MUTACOS
PTACOS
In other words, the marginal utility derived from the
last dollar spent on each good is identical. This can
be expanded to include all goods and services
purchased by the consumer.
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Consumer Equilibrium
Utility is maximized by
buying 5 tacos @ $0.50
and 2 hamburgers @ $1.25
given a budget constraint
of $5.00 per week….
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Consumer Equilibrium
Points B and D
exceed the budget
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Consumer Equilibrium
Point C does
not maximize
utility…
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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
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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.
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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?)
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Effects of Changes in Price of the Product
Line CAB forms
a consumer demand
schedule, showing
how the consumer
would respond to
changes in the price
of hamburgers.
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Effects of Changes in Available Income
Original
equilibrium
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Effects of Changes in Available Income
Both hamburgers and
tacos are “normal” goods
as income increased from
$5 to $6 per week.
Original
equilibrium
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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 ….
Original
equilibrium
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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
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Measurement and
Interpretation of
Market Demand
+
=
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!
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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.
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.
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.
Movement from
point A to C is
called a change
in demand…
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Movement from
point A to B is
called a change
in the quantity
demanded…
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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.
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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”.
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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.
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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!
F
G
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Area DACE is the
gain in consumer
surplus if the price
falls to $5
F
G
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Determining the level
of consumer surplus
F
G
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F
G
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F
G
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The level of consumer
surplus is (H×L)/2, or
(($11-$6)×5)/2=$12.50
F
G
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In Summary
Consumer equilibrium for
an individual for a given
price and budget
Individual consumer’s
demand schedule
Market demand curve
Engel curves
Change in demand vs.
change in quantity
demanded
Consumer surplus
Chapter 5 examines the
concept of elasticity, one of the
most important concepts in all
of economics….