1. L ECTURE T WO : D EMAND IMBA NCCU Managerial Economics Lecturer: Jack Wu

2. I NDIVIDUAL D EMAND C URVE, I Definition: graph of quantity that buyer will purchase at every possible price Construction -- “ Other things equal, how many would you buy at a price of ….? ’’ vertical axis -- price horizontal axis -- quantity

3. I NDIVIDUAL D EMAND C URVE Price Quantity ($ per movie) (movies per month) 10.00 0 7.50 1 5.00 2 2.50 4 0.00 7

4. 0 2.50 5 7.50 10 1472 individual demand curve Quantity (Movies a month) Price ($ per movie) INDIVIDUAL DEMAND CURVE

5. T WO V IEWS for every possible price, it shows the quantity demanded for each unit of item, it shows the maximum price that the buyer is willing to pay

6. D EMAND C URVE : S LOPE diminishing marginal benefit -- each additional unit of consumption/usage provides less benefit than the preceeding unit  demand curve slopes downward

7. C ONSUMER D IFFERENCES individual preferences  different demand curves changes in consumer's preferences, eg, age different consumers

8. H OOVER, 1992 A negative price case : Hoover ’ s special promotion -- two free air tickets (worth more than £ 400) for purchase of appliance over £ 100.  promotion attracted over 100,000 customers  Hoover incurred £ 48 million loss

9. D EMAND AND I NCOME Changes in income normal product – demand increases with income inferior product – demand falls with income

10. D EMAND AND O THER F ACTORS prices of related products substitutes complements advertising

11. Quantity (Movies a month) 0 127 2.50 5 7.50 10 demand curve with $1 popcorn demand curve with $1.50 popcorn Price ($ per movie) COMPLEMENT

12. R ECORDED M USIC ArgentinaCanada CD purchases0.52.6 cassette purchases 0.20.4 GDP/capita$9,413$19,831 CD price$13.80$11.55 cassette price$ 7.80$ 6.06

13. R ECORDED M USIC Why the average Canadian bought more of both CDs and cassettes? Why the ratio of CD to cassette purchases was relatively higher in Canada?

14. R ECORDED M USIC Canadians enjoyed higher incomes Cassettes were a relatively inferior product compared to CDs Another possible explanation: difference in the relative prices of CDs and cassettes _ Canada: 11.55/6.06=1.9 _ Argentina: 13.80/7.80=1.77 * don’t not explain why Canadians bought relatively more CDs than Argentines.

15. F OOTBALL : T O BROADCAST ? Live broadcasting of away games and attendance at home games are complements Live broadcasting of home games and attendance at home games are both substitutes and complements

16. U SED C ARS 19901997/98 avg car age7.5 yr8.7 yr median household income up 29.9% avg new car priceup 48.4%

17. U SED C ARS Reasons for the increasing demand for used cars: _ fast rising price of new cars _ increasing quality of used cars _ auto manufacturer reduced frequency of changing designs _ financial institutions began to offer more favorable rates.

18. M ARKET D EMAND Market demand = horizontal summation of individual demands

19. M ARKET D EMAND Market demand = horizontal summation of individual demands Market Demand Factors --own price (move along the demand curve) --other factors (shift the demand curve) _ income level and distribution _ prices of related goods _ population _ demographics _ consumer tastes

20. B UYER S URPLUS individual buyer surplus: difference between consumer ’ s benefit and price she must pay for the item market buyer surplus: sum of individual buyer surpluses.

21. 0 2.50 5 7.50 10 1247 c be h j g da individual buyer surplus at $2.50 price individual demand (marginal benefit) curve Quantity (Movies a month) Price ($ per movie) c f INDIVIDUAL BUYER SURPLUS

22. G AINS FROM PRICE CUT lower price on the quantity that he/she would have purchased at the original price (inframarginal units) he/she can buy more (marginal units) Case: Student discount price for movie

23. P ACKAGE D EAL charge buyer just a little less than her/his total benefit leave buyer with almost zero surplus

24. T WO -P ART T ARIFF fixed payment usage charge fixed payment

25. B USINESS D EMAND, I Business demands items as inputs into further production, not for consumption finished/semi-finished components -- raw materials and energy labor and other services capital

26. B USINESS D EMAND, II Demand for inputs depends on quantity of final output prices of complements and substitutes in production

27. B USINESS D EMAND C URVE marginal benefit = increase in revenue arising from an additional unit of the input diminishing marginal benefit  downward- sloping demand

28. A UTOMATED T ELLER M ACHINES increase in wages  teller service became increasingly costly banks used ATMs to substitute for tellers compare use of ATMs in US vs India

29. GM: W HAT METAL TO USE ? aluminium vis- à -vis steel auto weight  fuel consumption emissions price

30. D ISCUSSION Q UESTION 1 In 1998, the value of worldwide sales of recorded music in the form of singles, music cassettes, and CDs was $38.7 billion. Americans bought 3.1 CDs and 0.6 music cassette per capita, while Mexicans bought 0.5 CD and 0.3 music cassette per capita. Explain why per capita CD sales were relatively higher while per capita sales of music cassettes were relatively lower in the United States than in Mexico.

31. ANSWER Music CDs are a normal product, while music cassettes are an inferior product.

32. D ISCUSSION Q UESTION 1 CONTINUED On a suitable diagram, draw the U.S. demand for music CDs. Explain how the following changes would affect the demand curve: (i) increase in the price of CDs; (ii) rise in the ownership of CD players; and (iii) fall in the price of music cassettes.

33. ANSWER (i) Increase in the price of music CDs: movement along the demand curve; (ii) rise in CD player ownership: shift demand for CDs to the right; (iii) fall in the price of music cassettes: shift demand for CDs to the left.

34. D ISCUSSION Q UESTION 1 CONTINUED On another diagram, draw the demand for music CDs in Mexico. Explain how the following changes would affect the demand curve: (i) fall in advertising by music publishers such as Sony and Time Warner; (ii) reduction in the penalty for copyright infringement; and (iii) increase in the price of hamburgers.

35. DISCUSSION QUESTION 2. Between 2001 and 2003, China Mobile’s number of subscribers grew from 90.6 to 141.6 million as the company added subscribers and acquired service providers in the poorer inland regions of China. However, over the same period, its average revenue per user (APRU) fell from 141 to 102 yuan per month and its proportion of subscribers using pre-paid service rose from 48% to 64%.

36. DISCUSSION QUESTION 2 CONTINUED How would the entry of China Unicom affect the demand for China Mobile service? How would China Mobile’s provision of pre-paid service affect the demand for its post-paid (contract) service? Compare the demand for pre-paid service in the inland regions with that in the wealthier coastal regions. Relate your discussion in (b) and (c) to China Mobile’s decline in ARPU.

37. DISCUSSION QUESTION 3 The price of Chanel perfume is around $200 per fluid ounce, while the price of Arrowhead bottled water is $1 per gallon. Nancy buys 2 fluid ounces of Chanel and 10 gallons of bottled water a month.

38. DISCUSSION QUESTION 3 CONTINUED Using relevant demand curves, illustrate Nancy's choices. Illustrate how the following changes will affect Nancy's demand for Chanel perfume: (i) price increase to $220 per fluid ounce, and (ii) cut in price of another of Nancy's favorite perfumes. Nancy spends more money each month on perfume than bottled water. Does this necessarily mean that perfume gives her more total benefit than water? Use appropriate demand curves to address this question.