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

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

3. 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

4. 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. 

5. 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

6. 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

7. 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

8. 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)

9. 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

10. 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

11. 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