Chapter

3: Demand in a
Perfectly Compe66ve Market

Playconomics, LHS

Demand Curve for an Individual

- soda and other goods

-
-

1st soda can brings 2 uBls,

2nd soda can brings 4/3 uBls,

3rd soda can brings 1 uBl

- 1 unit of other goods brings 1 uBl (constant)

Price:

and

Budget =$4

? # of soda cans & other goods that max Isas sa6sfac6on?

Playconomics, LHS

Demand Curve for an Individual

Deni6ons:
U6lity represents the saBsfacBon that an
individual derives from consuming a given good
or taking a certain acBon. It is measured in u"ls
per unit of "me.




Playconomics, LHS

Demand Curve for an Individual

Deni6ons:
Decreasing Marginal U6lity captures the fact
that the uBlity from consuming an extra unit of a
given good decreases with the number of units
that have been previously consumed.




Playconomics, LHS

Demand Curve for an Individual

<

GO! Take the ac6on

Dont take the ac6on
Playconomics, LHS

Demand Curve for an Individual

Cost-Benet Principle:
The Cost-Benet Principle states that an acBon
should be taken if the marginal benet is greater
than the marginal cost.

Playconomics, LHS

Demand Curve for an Individual

Quan66es Demanded

Playconomics, LHS

Demand Curve for an Individual

Deni6on:
The Quan6ty Demanded by a consumer
represents the quanBty of a given good or
service that maximizes the uBlity experienced by
the individual consuming it.

Playconomics, LHS

Demand Curve for an Individual

Deni6on:
The Demand Curve represents the relaBonship
between the price of a good or service and the
quanBty demanded of that good or service.

Vary the price of soda cans to see how
the demand of soda cans would change with it (?)
Playconomics, LHS

Demand Curve for an Individual

If Pcan= $4 the quan6ty demanded is Q*can = 0 (Point A)
If Pcan= $2 the quan6ty demanded is Q*can = 1 (Point B)

Playconomics, LHS

10

Demand Curve for an Individual

Law of Demand:
The tendency for a consumer to demand more
of a certain good or service when the price of
that good or service decreases.

Playconomics, LHS

11

Demand Curve for an Individual

Why did the demand for soda ! when price "?

other goods became cheaper (relaBve to the price of

soda) than before and so Isa decided to consume
more of them

an increase in the price soda makes Isa poorer in
terms of her purchasing power

Playconomics, LHS

12

Demand Curve for an Individual

Deni6on:
The Subs6tu6on Eect captures the change in the
quanBty demanded of a given good following a
change in its relaBve price.
! price SubsBtuBon Eect " quanBty consumed.
" price SubsBtuBon Eect ! quanBty consumed.

Playconomics, LHS

13

Demand Curve for an Individual

Deni6on:
The Income Eect captures the changes in the
quanBty demanded of a given good following the
reducBon in the consumers purchasing power.
! price Income Eect ? quanBty consumed.
" price Income Eect ? quanBty consumed.

Playconomics, LHS

14

Demand Curve for an Individual

Income Eect:
For a normal good,
! in income ! quanBty consumed.
" in income " quanBty consumed.
For an inferior good,
! in income " quanBty consumed.
" in income ! quanBty consumed.

Playconomics, LHS

15

Demand Curve for an Individual

Subs6tu6on Eect + Income Eect:
Usually the SubsBtuBon Eect dominates so
" price ! overall quanBty consumed.
! price " overall quanBty consumed.
For a Gien good (very rare),
" in price " overall quanBty consumed!!

Playconomics, LHS

16

Demand Curve for an Individual

Demand curve can be interpreted

: Start from a certain Price and then use

the demand curve to derive the QuanBty of goods
that the consumer is willing to buy at that price .
: Start from a given QuanBty, nd the
associated Price on the demand curve the
maximum amount of money the consumer is willing
to pay for the marginal unit of the good, also called
Consumer Reserva-on Price (or Willingness to Pay)
Playconomics, LHS

17

From a Discrete to a ConBnuous Model

Playconomics, LHS

18

From a Discrete to a Con6nuous Model

Playconomics, LHS

19

From a Discrete to a ConBnuous Model

Demand Curve = MB curve (for consumer)

P # ?? Q # move along the demand curve

preferences (mk6ng, price of other goods) # shi9 of
the demand curve

Playconomics, LHS

20

From a Discrete to a ConBnuous Model

Deni6on:
Two goods are Subs6tutes when an " in the price
of one causes an " in the quanBty demanded of the
other.
Two goods are Complements when a ! in the price
of one causes an " in the quanBty demanded of the
other.

Playconomics, LHS

21

From a Discrete to a ConBnuous Model

What

Successful
campaign
Decrease in the

An increase in the

An increase in
for a normal good
A decrease in
for an inferior good
A posiBve shif in
for a good

(about in future prices that push the
buyers to try to purchase the goods early)

Playconomics, LHS

22

Price ElasBcity of Demand

Deni6on:
The Price Elas6city of Demand represents the
percentage change in the quan"ty demanded
resul"ng from a very small percentage change in
price. It also measures the responsiveness of the
demand to changes in price.



Playconomics, LHS

23

Price ElasBcity of Demand

Elas6cityA = (1/slope) x (PA/QA)
Elas6cityA = (Q/QA) / (P/PA)

Elas6cityA < 0 Why? "P # !Q
!P # "Q

(Conven6on:
When we report the elas6city we
always use its absolute value)

Playconomics, LHS

24

Price ElasBcity of Demand

Law of Demand:
Demand curves have the tendency of being
downward sloping.

Playconomics, LHS

25

Price ElasBcity of Demand

Deni6on:
Elas6c Demand: Demand is elasBc when the price
elasBcity of demand is greater than 1.
Unit Elas6c Demand: Demand is unit elasBc when
the price elasBcity of demand is equal to 1.
Inelas6c Demand: Demand is inelasBc when the
price elasBcity of demand is less than 1.


Playconomics, LHS

26

Price ElasBcity of Demand

What changes the elas6city of demand:

Playconomics, LHS

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