1. Consumer Equilibrium and Market Demand Chapter 4

2. Topics of Discussion Conditions for Consumer Equilibrium Changes in Equilibrium Changes in product price Changes in other demand determinants The Law of Demand Tastes and Preferences Composition of the population Attitudes toward nutrition or health – food safety – lifestyles –technological forces –advertising Consumer Surplus

3. Theory of Consumer Economic Behavior 1. Indifference Curve Consumer Preferences 2. Budget Line Affordability Consumer Equilibrium Leads to Demand Curve for the Product

4. Consumer Equilibrium

5. Measurement and Interpretation of Consumer Equilibrium

6. Consumer Equilibrium Must find the point where utility is maximized subject to the budget constraint. This situation occurs where: MU HAMBURGERS MU TACOS P HAMBURGERS P TACOS = Page 54

7. Consumer Equilibrium Must find the point where utility is maximized subject to the budget constraint. This situation occurs where: MU HAMBURGERS MU TACOS P HAMBURGERS P TACOS = In other words, the marginal utility derived from the last dollar spent on each good is identical. This relationship can be expanded to include all goods and services purchased by the consumer. Page 54

8. Utility is maximized by buying 5 tacos @ $0.50 and 2 hamburgers @ $1.25 given a budget constraint of $5.00 per week…. Utility is maximized by buying 5 tacos @ $0.50 and 2 hamburgers @ $1.25 given a budget constraint of $5.00 per week…. Consumer Equilibrium

9. Page 54 Points B and D exceed the budget Points B and D exceed the budget Consumer Equilibrium

10. Page 54 Point C does not maximize utility… Point C does not maximize utility… Consumer Equilibrium

11. Page 55 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 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

12. Page 55 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. A price decrease of hamburger prices to $1.00 would cause Carl to increase his weekly purchases of hamburgers from 2 to 3.

13. Page 55 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?) 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?)

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

15. A B C D

16. Three “Laws” in Economics So Far (1) Law of Diminishing Marginal Utility (2) Law of Demand (3) Engel’s Law

17. Scatter Plot Analysis of Demand for Steak

20. Original equilibrium Original equilibrium Page 57 Effects of Changes in Available Income

21. Original equilibrium Original equilibrium Both hamburgers and tacos are “normal” goods as income increased from $5 to $6 per week. Both hamburgers and tacos are “normal” goods as income increased from $5 to $6 per week. Page 57 Effects of Changes in Available Income

22. Original equilibrium Original equilibrium Page 57 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 …. But tacos became an “inferior” good however when income increased to $8 per week. As income increased, taco consumption fell ….

23. Engel curve for hamburgers Engel curve for tacos Normal good as the budget increases from $5 to $8 Normal good as the budget increases from $5 to $8 Inferior good as the budget increases from $6 to $8 Inferior good as the budget increases from $6 to $8 Page 58

24. Measurement and Interpretation of Market Demand

25. 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! 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 59 + =

26. Factors Influencing Demand 1. Own Price 2. Other Prices 3. Income/Wealth 4. Tastes and Preferences Advertising Health and Nutrition Food Safety Population

27. 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.

28. 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.

29. 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.

30. Movement from point A to C is called a change in demand… Movement from point A to C is called a change in demand… Page 61

31. Movement from point A to B is called a change in the quantity demanded… Movement from point A to B is called a change in the quantity demanded… Page 61

32. 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.

33. 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”.

34. 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.

35. FG Area ABC is the consumer surplus if price is $6. The demand curve implies they were willing to pay $10 for the 1 st unit, $9 for the second unit, etc. But they only had to pay $6 each for all 5 units! Area ABC is the consumer surplus if price is $6. The demand curve implies they were willing to pay $10 for the 1 st unit, $9 for the second unit, etc. But they only had to pay $6 each for all 5 units! Page 63

36. FG Area DACE is the gain in consumer surplus if the price falls to $5 Area DACE is the gain in consumer surplus if the price falls to $5 Page 63