Consumer Equilibrium and Market Demand

Consumer Equilibrium and Market DemandChapter 4Chapter 4 - Topics of Discussion Conditions for Consumer Equilibrium Changes in EquilibriumChanges in product priceChanges in other demand determinants The Law of Demand Tastes and PreferencesComposition of the populationAttitudes toward nutrition or health food safety lifestylestechnological forcesadvertising Consumer SurplusTheory of Consumer Economic Behavior1. Indifference CurveConsumer Preferences2. Budget LineAffordabilityConsumer EquilibriumLeads to Demand Curve for the ProductConsumer Equilibrium

Measurement andInterpretation ofConsumer EquilibriumConsumer EquilibriumMust find the point where utility is maximized subject to the budget constraint.This situation occurs where:MUHAMBURGERS MUTACOS PHAMBURGERS PTACOS = Page 54Consumer EquilibriumMust find the point where utility is maximized subject to the budget constraint.This situation occurs where:MUHAMBURGERS MUTACOS PHAMBURGERS PTACOS = In other words, the marginal utility derived from thelast dollar spent on each good is identical. This relationship can be expanded to include all goods and services purchased by the consumer.Page 54

Page 54Utility is maximized bybuying 5 tacos @ $0.50and 2 hamburgers @ $1.25given a budget constraintof $5.00 per week.Consumer Equilibrium

Page 54Points B and D exceed the budgetConsumer Equilibrium

Page 54Point C doesnot maximizeutilityConsumer Equilibrium

Page 55Effects of Changes in Price of the ProductLets look at theimpact of threeseparate price levels($5.00, $1.25 and $1.00)on this consumersweekly purchases ofhamburgers

Page 55A price decrease ofhamburger prices to$1.00 would causeCarl to increase hisweekly purchases of hamburgers from2 to 3.Effects of Changes in Price of the Product

Page 55If the price insteadincreases to $5.00,Carl would only wantone-half a hamburgerper week (would youbelieve 1 hamburgerevery other week?)Effects of Changes in Price of the Product

Page 55Line CAB forms the basis of a consumer demand schedule, showing how the consumer would respond to changes in the priceof hamburgers.Effects of Changes in Price of the Product

ABCDThree 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

OriginalequilibriumPage 57Effects of Changes in Available Income

OriginalequilibriumBoth hamburgers andtacos are normal goodsas income increased from$5 to $6 per week.Page 57Effects of Changes in Available Income

OriginalequilibriumPage 57But tacos became an inferior good however when income increased to $8 per week.

As income increased , tacoconsumption fell .Effects of Changes in Available Income

Engel curve for hamburgersEngel curve for tacosNormal good as thebudget increases from$5 to $8Inferior good as the budget increases from$6 to $8Page 58Measurement andInterpretation ofMarket Demand

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!Page 59+=Factors Influencing Demand1. Own Price2. Other Prices3. Income/Wealth4. Tastes and PreferencesAdvertising Health and NutritionFood SafetyPopulationSome 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.

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.

Some Important JargonWhen 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 frompoint A to C iscalled a changein demandPage 61

Movement from point A to B iscalled a changein the quantity demandedPage 61Concept 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.

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.

Concept of Consumer SurplusAn 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.

FGArea 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!Page 63

FGArea DACE is thegain in consumersurplus if the pricefalls to $5Page 63