Consumer Equilibrium and Market Demand

Chapter 4

Chapter 4 Topic of Discussion

Conditions for Consumer Equilibrium Changes in Equilibrium Changes in product price Changes in other demand determinants The Law of Demand Tastes and Preferences Composition of the population Attitudes toward nutrition or health food safety lifestyles technological forces advertising Consumer Surplus

Theory of Human Economic Behavior

1. Indifference Curve Consumer Preferences 2. Budget Line Affordability Consumer Equilibrium Leads to Demand Curve for the Product

Consumer Equilibrium

MUH (T PH MRS ! ! ! MUT (H PT

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. Page 76

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

Lets look at the impact of three separate price levels ($5.00, $1.25 and $1.00) on this consumers 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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Demand Schedule for Hamburgers

$7.00

Price of hamburgers

$6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00

D C

B
3

Quantity of hamburgers

Three Laws in Economics So Far

(1) Law of Diminishing Marginal Utility (2) Law of Demand (3) Engels Law

Scatter Plot Analysis of Demand for Steak

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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Factors Influencing Demand

1. Own Price 2. Other Prices 3. Income/Wealth 4. Tastes and Preferences Advertising Health and Nutrition Food Safety Population

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.

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.

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 10 when we discuss market equilibrium.

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!

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Area DACE is the gain in consumer surplus if the price falls to $5

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