Transcript Demand Curves - UCSB Economics

Demand Curves
Do you own an iPod?
1) Yes
2) No
Clicker Test
Press the Letter A on your clicker.
What is the most you would be willing to pay for an
iPod Nano? (if you didn’t have an iPod and couldn’t
get one for less)
1) Less than $100
2) $101-$150
3) $151-$200
4) $201-$250
5) $251-$300
6) $301-$350
7) $351-$400
8) $401-$500
9) $501-$600
10)More than $600
Do you own an iPhone?
1) Yes
2) No
What is the most you would be willing to pay
for an iPhone? (if you couldn’t get one for less)
1) Less than $100
2) $101-$200
3) $201-$300
4) $301-$400
5) $401-$500
6) $501-$600
7) $601-$700
8) $701-$800
9) $801-$1000
10)More than $1000
Price and Quantity
• Apple recently announced that it had sold a
total of 1 million iPhones.
• Price was $599 when introduced in July, 2007.
• In September, 2007 Apple cut the price to
$399.
• How will this affect Apple sales?
Demand function
• The demand function for a good reports the
number of units that demanders will want to
buy as a function of the price of the good.
– Individual demand function: Number of units one
person will buy as function of price.
– Market demand: Total number of units bought as
a function of price.
Drawing demand curve
• Economics tradition: Put quantity on
horizontal axis, price on vertical axis.
• Typically demand curve slopes down: Higher
price means lower quantity demanded.
P
r
i
c
e
Quantity
Individual demand: reservation price
model
• Consider a good, like an iPod, or a refrigerator, or
a textbook, such that most demanders buy one
unit or none at all.(A second unit isn’t of much
use.)
• A demander’s “reservation price” or “Buyer
Value” is the highest price that he would be
willing to pay to have the good rather than not
have it.
• Answers to our iPod and iPhone questions are
Buyer Values.
Individual Demand Curve with
reservation price $200
Price
$200
1
Quantity
A Market demand Curve
Buyer Value
Number of
Demanders
$100
10
$200
15
$300
10
Price
$300
$200
$100
10
25
35
Quantity
If price is $10, how many units will
be demanded?
Buyer Value # Demanders
$20
11
$40
21
A) 0 units
B) 11 units
C) 21 units
D) 32 units
If price is $30, how many units will
be demanded?
Buyer Value # Demanders
$20
11
$40
21
A) 0 units
B) 11 units
C) 21 units
D) 32 units
Many consumers, many steps
• The market demand curve in our example had
only 3 different Buyer Values and hence was
like a stairway with 3 steps.
• If there are many demanders with different
Buyer Values, steps become small, demand
curve is well approximated by a continuous
curve.
Linear demand curve
• A useful example: Linear demand curve.
• p=a-bq for some a and b.
Price
• Total expenditures on a
Good are price x quantity.
Note that pq=(a-bq)q=aq-bq2
Quantity
Individuals may consume more
than one unit.
• Typical case: Diminishing marginal willingness
to pay for an additional unit.
• Keep buying so long as one more unit is worth
more than the price.
• This implies that you will buy more units if
price is lower.
Individual demand for gasoline
• The higher the price of gasoline, the less
gasoline per month someone will buy.
Price per
gallon
Gallons
Per month
Market demand
• For any price, market demand is sum of
quantities demanded by individuals.
Person 1
Demand Curve
Price
Person 2
Demand
Curve
Market demand
Curve
Consumers’ Surplus
• Difference between what you pay for a good
and the most you would be willing to pay
rather than go without the good.
• Example: You are willing to pay $350 for an
IPOD nano. They cost $199.
• What is your consumers’ surplus?
Consumers’ surplus for consumer
who demands multiple goods.
• Area under demand curve, above the price.
Consumer’s
Surplus
Readings
• Prepare for Experiment 1 by reading
description of this experiment in Bergstrom
Miller text.
• Show up at your section. You must go to your
own section.
• Read McAfee, Chapter 2, Section 2.1.1.
(If you don’t know calculus, skip the calculus
discussion on pp 2-11-2-14.)
OK, We’re out of here