Transcript Lecture One
Lecture Two: Demand 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) month) 10.00 7.50 5.00 2.50 0.00 Quantity (movies per 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 Price Joy Max Lucas Market $10 0 0 0 0 $7.50 1 0 0 1 $5 2 1 0 3 $2.50 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 downward-sloping demand Automated Teller Machines increase in wages teller service became increasingly costly banks used ATMs to substitute for tellers compare use of ATMs in US vs India 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. 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. 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 Suppose that a typical household's demand for long-distance calls is represented by the equation, D = 200 4p + 0.4Y, where D is the quantity demanded in minutes a month, p is the price of calls in cents per minute, and Y is the household's income in thousands of dollars a year. Assume that Y = 100. Discussion Question 2 continued Draw the household's demand curve. How many minutes will the household buy at a price of 25 cents a minute? What is the maximum lump sum that a long-distance carrier can charge the household for a package of 140 minutes of calls?