Download - Consumer Equilibrium and Market Demand
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ConsumerEquilibriumand Market
DemandChapter 4
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Discussion TopicsConditions for consumer equilibriumChanges in equilibriumThe law of demandTastes and preferencesConsumer surplus
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Measurement andInterpretation of
Consumer Equilibrium
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Consumer EquilibriumMust find the point where where utility is maximized subject to the budget constraint.
This occurs where:
MUHAMBURGERS MUTACOS
PHAMBURGERS PTACOS
=
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Consumer EquilibriumMust find the point where where utility is maximized subject to the budget constraint.
This occurs where:
MUHAMBURGERS MUTACOS
PHAMBURGERS PTACOS
=
In other words, the marginal utility derived from thelast dollar spent on each good is identical. This can be expanded to include all goods and servicespurchased by the consumer.
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Utility is maximized bybuying 5 tacos @ $0.50and 2 hamburgers @ $1.25given a budget constraintof $5.00 per week….
Consumer Equilibrium
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Points B and D exceed the budget
Consumer Equilibrium
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Point C doesnot maximizeutility…
Consumer Equilibrium
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Effects of Changes in Price of the Product
Let’s look at theimpact of threeseparate price levels($5.00, $1.25 and $1.00)on this consumer’sweekly purchases ofhamburgers
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Effects of Changes in Price of the Product
A price decrease ofhamburger prices to$1.00 would causeCarl to increase hisweekly purchases Of hamburgers from2 to 3.
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Effects of Changes in Price of the Product
If the price insteadincreases to $5.00,Carl would only wantone-half a hamburgerper week (would youbelieve 1 hamburgerevery other week?)
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Effects of Changes in Price of the Product
Line CAB formsa consumer demandschedule, showinghow the consumerwould respond tochanges in the priceof hamburgers.
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Originalequilibrium
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Effects of Changes in Available Income
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Originalequilibrium
Both hamburgers andtacos are “normal” goodsas income increased from$5 to $6 per week.
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Effects of Changes in Available Income
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Originalequilibrium
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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 , tacoconsumption fell ….
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Engel curve for hamburgers Engel curve for tacos
Normal good as thebudget increases from$5 to $8
Inferior good as the budget increases from$6 to $8
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Measurement andInterpretation ofMarket Demand
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The market demand curve for a particular product canbe seen as a horizontal summation of the demand schedulesfor 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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+ =
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Some Important JargonWhen discussing events in the market place,economists use specific terms to distinguishbetween movement along a demand curve and a shift in a demand curve.
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Some Important JargonWhen discussing events in the market place,economists use specific terms to distinguishbetween 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.
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Some Important JargonWhen discussing events in the market place,economists use specific terms to distinguishbetween 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.
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Movement frompoint A to C iscalled a changein demand…
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Movement from point A to B iscalled a changein the quantity demanded…
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Concept of Consumer SurplusAn important extension of the market demand curveis the concept of consumer surplus, or economic wellbeing consumers derive in the market.
The demand curve reveals the willingness of consumersto pay a certain price for a corresponding quantity.
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Concept of Consumer SurplusAn important extension of the market demand curveis the concept of consumer surplus, or economic wellbeing consumers derive in the market.
The demand curve reveals the willingness of consumersto pay a certain price for a corresponding quantity.
They are willing to pay a higher price for a lesserquantity, but do not have to given the level of supplycoming onto the market in a given period. Thus, theyrealize a “savings”.
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Concept of Consumer SurplusAn important extension of the market demand curveis the concept of consumer surplus, or economic wellbeing consumers derive in the market.
The demand curve reveals the willingness of consumersto pay a certain price for a corresponding quantity.
They are willing to pay a higher price for a lesserquantity, but do not have to given the level of supplycoming onto the market in a given period. Thus, theyrealize a “savings”.
We will use this concept later in Chapter 8 when we discuss market equilibrium.
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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 secondunit, etc. But they only hadto pay $6 each for all 5 units!
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F G
Area DACE is thegain in consumersurplus if the pricefalls to $5
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F G
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Determining the level of consumer surplus
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F G
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F G
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F G
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The level of consumersurplus is (H×L)/2, or(($11-$6)×5)/2=$12.50
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In SummaryConsumer equilibrium for
an individual for a given price and budget
Individual consumer’s demand schedule
Market demand curveEngel curvesChange in demand vs.
change in quantity demanded
Consumer surplus
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Chapter 5 examines the concept of elasticity, one of the most important concepts in all of economics….