Consumer Equilibrium and Market Demand

1. ConsumerEquilibriumand MarketDemand Chapter 4

2. Discussion Topics • Conditions for consumer equilibrium • Changes in equilibrium • The law of demand • Tastes and preferences • Consumer surplus

3. Measurement andInterpretation ofConsumer Equilibrium

4. Consumer Equilibrium Must find the point where where utility is maximized subject to the budget constraint. This occurs where: MUHAMBURGERS MUTACOS PHAMBURGERS PTACOS = Page 68

5. Consumer Equilibrium Must 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 the last dollar spent on each good is identical. This can be expanded to include all goods and services purchased by the consumer. Page 68

6. 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…. Page 67

7. Consumer Equilibrium Points B and D exceed the budget Page 67

8. Consumer Equilibrium Point C does not maximize utility… Page 67

9. 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 Page 68

10. 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. Page 68

11. 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?) Page 68

12. 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. Page 68

13. Effects of Changes in Available Income Original equilibrium Page 71

14. Effects of Changes in Available Income Both hamburgers and tacos are “normal” goods as income increased from $5 to $6 per week. Original equilibrium Page 71

15. 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 Page 71

16. Engel curve for tacos Engel curve for hamburgers Normal good as the budget increases from $5 to $8 Inferior good as the budget increases from $6 to $8 Page 72

17. Measurement andInterpretation ofMarket Demand

18. = + 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! Page 73

19. 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.

20. 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.

21. 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.

22. Movement from point A to C is called a change in demand… Page 75

23. Movement from point A to B is called a change in the quantity demanded… Page 75

24. 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. Page 77

25. 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”. Page 77

26. 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. Page 77

27. 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 Page 78

28. Area DACE is the gain in consumer surplus if the price falls to $5 F G Page 78

29. Determining the level of consumer surplus F G Page 78

30. F G Page 78

31. F G Page 78

32. The level of consumer surplus is (H×L)/2, or (($11-$6)×5)/2=$12.50 F G Page 78

33. 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

34. Chapter 5 examines the concept of elasticity, one of the most important concepts in all of economics….