Transcript Lecture One

LECTURE TWO: DEMAND
IMBA NCCU
Managerial Economics
Lecturer: Jack Wu
INDIVIDUAL DEMAND CURVE, 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
INDIVIDUAL DEMAND CURVE

Price
($ per movie)
10.00
7.50
5.00
2.50
0.00
Quantity
(movies per month)
0
1
2
4
7
INDIVIDUAL DEMAND CURVE
Price ($ per movie)
10
7.50
individual demand curve
5
2.50
0
1
2
4
Quantity (Movies a month)
7
TWO VIEWS
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

DEMAND CURVE: SLOPE

diminishing marginal benefit -- each additional
unit of consumption/usage provides less benefit
than the preceeding unit
 demand
curve slopes downward
CONSUMER DIFFERENCES

individual preferences  different demand
curves
changes in consumer's preferences, eg, age
 different consumers

HOOVER, 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
DEMAND AND INCOME
Changes in income
normal product – demand
increases with income
inferior product – demand falls
with income
DEMAND AND OTHER FACTORS

prices of related products
substitutes
 complements


advertising
COMPLEMENT
Price ($ per movie)
10
demand curve with $1 popcorn
7.50
5
demand curve with $1.50 popcorn
2.50
0
1
2
Quantity (Movies a month)
7
RECORDED MUSIC
Argentina Canada
CD purchases
0.5
2.6
cassette
purchases
GDP/capita
0.2
0.4
$9,413
$19,831
CD price
$13.80
$11.55
cassette price
$ 7.80
$ 6.06
RECORDED MUSIC
Why the average Canadian bought more of both
CDs and cassettes?
 Why the ratio of CD to cassette purchases was
relatively higher in Canada?

RECORDED MUSIC
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.

FOOTBALL: TO 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

USED CARS
avg car age
1990
1997/98
7.5 yr
8.7 yr
median
household income
up 29.9%
avg new car price
up 48.4%
USED CARS
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.

MARKET DEMAND
Market demand = horizontal summation
of individual demands
P rice
Jo y
M ax
Lu ca s
M a rke t
$10
0
0
0
0
$ 7 .5 0
1
0
0
1
$5
2
1
0
3
$ 2 .5 0
4
2
3
9
$0
7
6
4
17
MARKET DEMAND
Market
demand = horizontal
summation of individual demands
Market Demand Factors
--own price (move along the demand curve)
--other factors (shift the demand curve)
_ income level and distribution
_ prices of related goods
_ population
_ demographics
_ consumer tastes
BUYER SURPLUS
individual buyer surplus: difference between
consumer’s benefit and price she must pay for the
item
 market buyer surplus: sum of individual buyer
surpluses.

INDIVIDUAL BUYER SURPLUS
Price ($ per movie)
10
individual buyer surplus at $2.50 price
7.50 d
5 c
a
b
e
individual demand
(marginal benefit) curve
f
2.50 g
h
j
0
1
2
4
Quantity (Movies a month)
7
GAINS 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

PACKAGE DEAL
charge buyer just a little less than her/his total
benefit
 leave buyer with almost zero surplus

TWO-PART TARIFF
fixed payment
 usage charge

fixed
payment
usage
charge
BUSINESS DEMAND, 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
BUSINESS DEMAND, II
Demand for inputs depends on
 quantity of final output
 prices of complements and substitutes in
production
BUSINESS DEMAND CURVE
marginal benefit = increase in revenue arising
from an additional unit of the input
 diminishing marginal benefit  downwardsloping demand

AUTOMATED TELLER MACHINES
increase in wages  teller service became
increasingly costly
 banks used ATMs to substitute for tellers

 compare
India
use of ATMs in US vs
GM: WHAT METAL TO USE?
aluminium vis-à-vis steel
 auto weight 
fuel consumption
 emissions


price
DISCUSSION QUESTION 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.
ANSWER

Music CDs are a normal product, while music
cassettes are an inferior product.
DISCUSSION QUESTION 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.
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.
DISCUSSION QUESTION 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.
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%.
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.

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.
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.
