Consumer Demand Theory 1-9-2009 Econ 201 Lecture 1.5 Consumer Demand Theory 1-9-2009

Overview Marginal Value or Marginal Willingness-to- Pay First Law of Demand Total WTP, Total Amount Paid, Consumer Surplus

First Law of Demand First law of demand, The lower a good’s price it, the greater the quantity demanded (by an individual or the market) Demand Entire schedule: quantity demanded at various prices Quantity demanded The amount demanded at a given price

From the Demand Side First Law of Demand What Does Law Of Demand Mean? all other factors being equal, as the price of a good or service increases, consumer demand for the good will decrease and vice versa.  http://www.investopedia.com/terms/l/lawofdemand.asp

A Demand Example Price Qty Demanded $10.00 1 $9.00 2 $8.00 3 $7.00 4 $6.00 5 $5.00 6 $4.00 7 $3.00 8 $2.00 9 $1.00 10

Consumer’s Marginal Value Some basic definitions Total Willingness-to-pay: “value in use” Maximum total amount you would be willing to pay for x units of the good than go without? Equals the area under the demand curve up to x units Total Value of 4 units

All the things a demand curve tells you about value of the good Demand Curve is Also Marginal Value and Avg Revenue CS Amount Paid Total WTP = CS + Amt Paid

In Class Example TV(Q-1)+MV(Q) Tot Val- Tot Paid Avg P*Qd Also = Avg Rev TV(Q)-TV(Q-1) Also = MV(Q)

Total and Marginal Value Price Qty Demanded Amt Paid Marginal Value Total Value $10.00 1 $9.00 2 $18.00 $19.00 $8.00 3 $24.00 $27.00 $7.00 4 $28.00 $34.00 $6.00 5 $30.00 $40.00 $5.00 6 $45.00 $4.00 7 $49.00 $3.00 8 $52.00 $2.00 9 $54.00 $1.00 10 $55.00 Price x Qty Dem Area under Demand Difference in TV(3)-TV(2) MV is also equal to price paid

Buy Rules Consumer will buy a good as long as: Total Willingness-to-Pay > Amount Paid There is always some consumer surplus, or incentive for consumer Consumer Surplus ≡ Difference () between maximum amount that you are willing-to-pay and what you have to pay CS ≡ Total WTP – Average Price x Qty Purhased Consumer will choose how much to buy (quantity demanded): Marginal Value >= price paid for the last unit For Perfect Competition: price same for all units -> price paid for last unit = average price

What Does a Demand Curve Tell You? A Demand Curve is also A Marginal Value Curve Tells you what the consumer’s marginal value of the last (incremental/additional) unit is An Average Revenue Curve Tells you what the average price needs to be in order to sell x units