Transcript document

Consumer Behavior and
Demand
Chapter 3
Characteristics of Consumer
Behavior


Human wants are insatiable
More is preferred to less
Utility


Utility is defined as the amount of
satisfaction received from a good or
bundle of goods.
Cardinal measures of utility


Numbers provide a measure of how
much more you like one good over
another
Ordinal measure of utility

Numbers provide a measure preference
ranking
Cardinal versus Ordinal measures
Law of Diminishing Marginal Utility


As a person consumes additional
units of a product, they derive less
satisfaction from each additional
unit.
Marginal Utility is equal to the
additional utility derived from
consuming one more unit of a good.
Utility from Pizza
Pizza Slices Total Utility Marginal Utility
1
2
3
4
5
6
5
9
12
14
15
15
Utility from Pizza
Pizza Slices Total Utility
1
2
3
4
5
6
5
9
12
14
15
15
Marginal Utility
5
Utility from Pizza
Pizza Slices Total Utility
1
2
3
4
5
6
5
9
12
14
15
15
Marginal Utility
5
4
Utility from Pizza
Pizza Slices Total Utility
1
2
3
4
5
6
5
9
12
14
15
15
Marginal Utility
5
4
3
2
1
0
Utility from Trucks
4x4 Trucks
1
2
3
4
Total Utility Marginal Utility
500
850
1075
1175
500
350
225
100
Let’s throw in a John Deere tractor
4x4 Trucks
1
2
3
4
One big green
machine
Total Utility Marginal Utility
500
850
1075
1175
1175
500
350
225
100
0
Now let’s try that Kubota
4x4 Trucks
1
2
3
4
One big orange
machine
Total Utility Marginal Utility
500
850
1075
1175
200,000,000
Wow, would you look at that!
500
350
225
100
199,999,825
Choices in Consumption
Let’s move from one good to two now
Pizza
Slices
7
6
5
4
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
.
This dot represents a consumption
bundle for the consumer
In math it is an ordered pair and can
be calculated like this (# Cokes, # Pizzas)
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
.
(1,7)
This dot represents a consumption
bundle for the consumer
In math it is an ordered pair and can
be calculated like this (# Cokes, # Pizzas)
Therefore this bundle of goods is made up
of one coke and seven pizza slices
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
.
.
Several Ordered Pairs = (# Cokes, # Pizzas)
These represent different consumption
bundles for the consumer
.
.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
.
.
(1,7)
.
.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
.
.
(1,7)
(2,5)
.
.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
.
.
(1,7)
(2,5)
.
.
.
(10,1)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
.
.
(1,7)
(2,5)
.
.
(6,2)
.
(10,1)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
.
.
(1,7)
(2,5)
.
(3,3)
.
(6,2)
.
(10,1)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
.
.
(1,7)
(2,5)
.
(3,3)
.
(6,2)
.
(10,1)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
This line is called an indifference curve
5
4
3
2
1
It can be labeled I or U for Utility Curve
I
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
Every point on an indifference curve gives
the consumer the same level of utility or
satisfaction
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
Indifference curves are:
Continuous
6
5
4
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
Indifference curves are:
Continuous
This one is not continuous
5
4
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
Indifference curves are:
Continuous
Convex to the origin
5
4
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
Indifference curves are:
Continuous
Convex to the origin
5
4
3
2
This is not convex to the origin
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
Indifference curves are:
Continuous
Convex to the origin
Fill the plane and never cross
5
4
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
Indifference curves are:
Continuous
Convex to the origin
Fill the plane and never cross
5
4
3
These cross and just make
a mess.
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Why can’t they cross?
Choices in Consumption
Pizza
Slices
7
6
5
The farther the indifference curve is away
from the origin the better off the
consumer is. The more of each good
they have:-)
4
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
Better Off
7
6
5
4
3
Worse Off
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
Indifference curves are convex to the origin
this gives us the Law of Diminishing Marginal
Rate of Substitution
What is means is that we are willing to
give up fewer and fewer slices of pizza
to get an additional coke
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
Remember I said we are constrained, in other
words we can’t get everything we want. How
is that represented on this graph?
6
5
4
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
Let’s say we have $10 to spend a day on
pizza and coke, what does that constraint
look like?
Well we need to know a couple other things
like what are the prices of coke and pizza.
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
If the price of pizza is $2 a slice how many
can we afford if we spend all our money
income on pizza?
4
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
.
If the price of pizza is $2 a slice how many
can we afford if we spend all our money
income on pizza? The answer is 5 slices.
4
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
If the price of coke is $1 a glass how many
can we afford if we spend all our money
income on coke?
4
3
2
1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
If the price of coke is $1 a glass how many
can we afford if we spend all our money
income on coke? The answer is 10 cokes.
4
3
2
1
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
.
These are the two endpoints of what is
known as a budget constraint. You can
afford to purchase one or the other.
4
3
2
1
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
.
The budget constraint shows every possible
combination of goods that the consumer
can purchase with a certain money income.
In this case it’s $10
3
2
1
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
.
How do we answer the question of how
consumers choose how much of each to
consume? Remember what a utility curve
represents?
4
3
2
1
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
. .
A
Which point do you think the consumer will
choose A, B or C? Why did you choose that
point?
.
B
..
I2
C
I1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
. .
A
Which point do you think the consumer will
choose A, B or C? Why did you choose that
point?
.
B
..
I2
C
I1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
What happens to the budget constraint
when the price of a good changes?
5
4
3
2
1
BC
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
If the Price of Coke doubles to $2.00
the budget constraint moves. More
specifically it rotates clockwise with the
Pizza slice endpoint staying the same.
It rotates until the coke endpoint is on 5.
3
2
1
BC
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
This is because we can only afford 5
cokes if when spend all of our income
on coke now.
4
3
2
1
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
What happens in a case where the prices
of both pizza and coke double?
4
3
2
1
BC
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
What happens in a case where the prices
of both pizza and coke double? The new
budget constraint shifts inward with the
endpoints 2.5 pizza slices and 5 cokes. It
is a parallel shift.
3
2
1
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
How does our consumption change now?
5
4
3
2
1
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
How does our consumption change now?
5
4
3
2
.
A
1
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
How does our consumption change now?
We move from point A to Point B.
6
5
4
3
2
1
.
.
A
B
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
Now lets go back to the example where the
price of coke goes from $1 to $2. How does
that affect consumption?
4
3
2
1
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
Now lets go back to the example where the
price of coke goes from $1 to $2. How does
that affect consumption?
4
3
2
1
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
Now lets go back to the example where the
price of coke goes from $1 to $2. How does
that affect consumption?
.
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
Now lets go back to the example where the
price of coke goes from $1 to $2. How does
that affect consumption?
.
.
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
Now lets go back to the example where the
price of coke goes from $1 to $2. How does
that affect consumption?
6
5
4
3
2
1
.
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Substitution Effect - when the price of a good changes
relative to another good, we substitute consumption towards
the good that has become relatively less expensive.
Income Effect - When the price of a good decreases the
consumers real income has risen, thus creating the potential
for consumption of both goods to increase.
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
Now lets see how we can use this utility
analysis to map out a demand curve for this
consumer
.
We start here with the price of coke at
$1. When the price is $1 the consumer
buys 5 cokes and 2.5 slices of pizza.
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
Now lets have the price of coke increasing
from $1 to $2. How does that affect
consumption?
.
.
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
Coke consumption goes from 5 units
down to 3 units. The price goes up,
consumption goes down. (Follows the
Law of Demand)
.
.
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
Now lets map out this consumer’s demand
curve.
.
.
BC2
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
Now lets map out this consumer’s demand
curve.
.
.
BC2
How many cokes will this consumer buy
at a price of $1……. 5 Cokes
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.
(5, $1.00)
.50
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Pizza
Slices
7
6
5
4
3
2
1
.
.
BC2
How many cokes will this consumer buy
at a price of $2……. 3 Cokes
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.
(3, $2.00)
.
(5, $1.00)
.50
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.
(3, $2.00)
.
(5, $1.00)
.50
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.50
.
(3, $2.00)
.
(5, $1.00)
Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Now we need to be able to determine the market demand
curve for a product like this coke for an individual.
Choices in Consumption
Now we need to be able to determine the market demand
curve for a product like this coke for an individual.
The market demand curve is the horizontal summation of
all individual demand curves for that particular good.
Choices in Consumption
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.50
.
(3, $2.00)
.
(5, $1.00)
Jane’s Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.50
.
(2, $1.50)
.
(5, $1.00)
Bill’s Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.50
.
.
(2, $1.50)
(3, $2.00)
.
(5, $1.00)
Bill’s Demand Curve for Coke
Jane’s Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.50
.
(3, $2.00)
. .
(2, $1.50)
.
(4, $1.50)
(5, $1.00)
Bill’s Demand Curve for Coke
Jane’s Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Choices in Consumption
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.50
.
(3, $2.00)
.
(6, $1.50)
.
(10, $1.00)
Market Demand
Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Types of Demand
Types of Demand
Elastic Demand - When the quantity response
is relatively large compared to the price change.
Types of Demand
Price
Coke $
3.50
Elastic Demand - When the quantity response
is relatively large compared to the price change.
3.00
2.50
2.00
1.50
1.00
Elastic Demand
.50
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Types of Demand
Price
Coke $
3.50
3.00
Elastic Demand - When the quantity response
is relatively large compared to the price change.
If you lower price total revenue increases
2.50
2.00
1.50
1.00
Elastic Demand
.50
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Types of Demand
How is total revenue calculated?
Types of Demand
How is total revenue calculated?
It is the price of the product times the quantity sold
Types of Demand
Price
Coke $
3.50
When Price = $2
3.00
2.50
.
2.00
1.50
1.00
.50
Total
Revenue =
$8
1 2 3 4 5 6 7 8 9 10 11 12
Elastic Demand
Coke
Types of Demand
Price
Coke $
3.50
3.00
When Price = $1
2.50
2.00
1.50
1.00
.50
Total
Revenue =
$12
.
1 2 3 4 5 6 7 8 9 10 11 12
Elastic Demand
Coke
Types of Demand
Inelastic Demand - When the quantity response
is relatively small compared to the price change.
Types of Demand
Price
Coke $
3.50
Inelastic Demand - When the quantity response
is relatively small compared to the price change.
3.00
2.50
2.00
1.50
1.00
.50
Inelastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Types of Demand
Price
Coke $
3.50
3.00
Inelastic Demand - When the quantity response
is relatively small compared to the price change.
If you lower price total revenue decreases
2.50
2.00
1.50
1.00
.50
Inelastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Types of Demand
Remember total revenue is calculated by the
price of the product times the quantity sold
Types of Demand
Price
Coke $
3.50
3.00
.
When Price = $3
2.50
2.00
1.50
Total
Revenue
=$6
1.00
.50
Inelastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Types of Demand
Price
Coke $
3.50
When Price = $1
3.00
2.50
2.00
1.50
1.00
.50
Total
Revenue =
$5
.
Inelastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Types of Demand
Price
Coke $
3.50
When Price = $1
3.00
2.50
2.00
1.50
1.00
.50
Total
Revenue =
$5
.
Inelastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
Types of Demand
Elasticity of Demand is considered to be Unitary when the
Percentage changes in price and quantity demanded are
the same.
In this case an increase in price doesn’t change the level
of income.
Types of Demand
How do you calculate the Elasticity of Demand?
%Change in Quantity
Price Elasticity of Demand
=
% Change in Price
Types of Demand
How do you calculate the Elasticity of Demand?
Q2 - Q1
Q2 + Q1
Price Elasticity of Demand
=
P2 - P1
P2 + P1
Price Elasticity of Demand



Ed > 1, Elastic
Ed < 1, Inelastic
Ed = 1, Unitary Elastic
One important note is that all of these elasticities are negative,
So we just take the absolute value of them. The sign for a
Price elasticity is meaningless.
Factors That Influence Demand
Elasticities



How many close substitutes there
are for the product
Whether or not there are many
alternative uses for the product
Whether the product is a major
expenditure in the consumers
budget
Factors That Influence Demand
Elasticities
What is the difference between a
Change in Quantity Demanded and
a Change in Demand?
A change in Quantity Demanded
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.50
.
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
A change in Quantity Demanded
Price
Coke $
3.50
3.00
.
Price goes up from $1 to $3 and the
Quantity Demanded goes down from
5 cokes to 2.
2.50
2.00
1.50
1.00
.50
.
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
A change in Quantity Demanded
Price
Coke $
3.50
3.00
.
Notice the demand curve did not change,
However the consumer’s position on that
Demand curve did change.
2.50
2.00
1.50
1.00
.50
.
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
A change in Quantity Demanded
Price
Coke $
3.50
3.00
2.50
.
A change in Quantity Demanded implies
A movement along the demand curve.
A price increase implies that Quantity
Demanded decreases.
2.00
1.50
1.00
.50
.
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
A Change in Demand
Price
Coke $
3.50
3.00
.
A change in Demand implies
A movement of the the demand curve.
2.50
2.00
1.50
1.00
.50
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
A Change in Demand
Price
Coke $
3.50
3.00
.
A change in Demand implies
A movement of the the demand curve.
2.50
2.00
1.50
1.00
.50
New Demand for Coke
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
A Change in Demand
Price
Coke $
3.50
3.00
2.50
2.00
.
.
A change in Demand implies
A movement of the the demand curve.
Now at $3 the consumer demands
4.5 units instead of the initial 2.
1.50
1.00
.50
New Demand for Coke
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
A Change in Demand
Price
Coke $
3.50
3.00
2.50
2.00
1.50
1.00
.50
.
.
A change in Demand implies
A movement of the the demand curve.
Now at $3 the consumer demands
4.5 units instead of the initial 2.
Demand is said to have risen
For this product.
New Demand for Coke
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
What Creates Changes in
Demand?





Population
Income
Tastes and Preferences
Related Product Prices
People’s Expectations
A Change in Demand from
Population
Price
Coke $
3.50
3.00
An increase in Population shifts the
demand curve outward.
2.50
2.00
1.50
1.00
.50
New Demand for Coke
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
A Change in Demand from
Income
Price
Steak $
3.50
3.00
An increase in Income shifts the
demand curve for Steak to the right
2.50
2.00
1.50
1.00
.50
New Demand for Steak
Demand for Steak
1 2 3 4 5 6 7 8 9 10 11 12
Steak
A Change in Demand from
Income
Price
Spam $
3.50
3.00
An increase in Income shifts the
demand curve for Spam or Rice
to the left
2.50
2.00
1.50
1.00
.50
New Demand for Spam
Demand for Spam
1 2 3 4 5 6 7 8 9 10 11 12
Spam
A Change in Demand from a
Change
in
Tastes
and
Preferences
Price
Health
Food $
3.50
An increase in Health Concerns shifts the
demand curve for Health Food to the right
3.00
2.50
2.00
1.50
1.00
.50
New Demand for Health Food
Demand for Health Food
1 2 3 4 5 6 7 8 9 10 11 12
Q Health Food
A Change in Demand from a Change in
the
price
of
a
Related
Good
Price
Coke $
3.50
An increase in the price of Pepsi shifts the
demand curve for Coke to the right
3.00
2.50
They are Substitutes
2.00
1.50
1.00
.50
New Demand for Coke
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Q Coke
A Change in Demand from a Change in
the
price
of
a
Related
Good
Price
Hamburgers
$
3.50
3.00
2.50
An increase in the price of French Fries
shifts the demand curve for Hamburgers
to the left
They are Complements
2.00
1.50
1.00
.50
New Demand for Hamburgers
Demand for Hamburgers
1 2 3 4 5 6 7 8 9 10 11 12
Q Hamburgers
A Change in Demand from a Change in
Consumer’s
Expectations
Price
Gasoline
$
3.50
3.00
If consumers expect there to be a shortage
On gasoline, then the demand curve for
Gasoline will shift to the right.
2.50
2.00
1.50
1.00
.50
New Demand for Gasoline
Demand for Gasoline
1 2 3 4 5 6 7 8 9 10 11 12
Q Gasoline
Income Elasticities
% Change in Quantity of Product
Income Elasticity
=
% Change in Income of Consumer
Income Elasticities
Engel Curve – The relationship between the
consumers income and the quantity he or
she purchases of an item.
Engel Curve for Food
Quantity
Food
Purchased
1 2 3 4 5 6 7 8 9 10 11 12
Weekly Income in 000’s
Engel Curve for Clothing
Quantity
Clothing
Purchased
1 2 3 4 5 6 7 8 9 10 11 12
Weekly Income in 000’s
Income Elasticities
Q2 - Q1
Q2 + Q1
Income Elasticity
=
I2 - I1
I2 + I1
Income Elasticities




Ei > 0, Normal Good
Ei < 0, Inferior Good
Ei> 1, Luxury
Ei< 1, Necessity
Cross Price Elasticities
Cross Price Elasticities measure the responsiveness
Of Demand for good 1 to a change in the price of
good 2
Answers the question: How does the quantity demanded of coke
Change from a change in the price of pepsi?
Cross Price Elasticities
Coke and Pepsi
For Substitutes: An increase in the price of one
Will increase the demand of the other.
The Cross Elasticity of Coke for Pepsi is > 0
Ec,p>0
Cross Price Elasticities
Hamburgers and French Fries
For Complements: An increase in the price of one
will decrease the demand of the other.
The Cross Elasticity of Hamburgers for
French Fries is < 0
Eh,ff <0