Microeconomics Ch 20.pptx

8/12/2019 Microeconomics Ch 20.pptx

1/42

M i c r o e c o n o m i c

s

Dr. Karim Kobeissi


2/42

C h a p t e r 2 0 : T h eD e m a n d f o r G o o d s


3/42

I n t r o d u c t i o n

Have you ever onder:

1) How do consumers decide how much of any good to buy?

2) How does a change in a products price aect the

quantity they purchase or the amount of money they

spend on it ?

3) Why do consumers buy certain products but not others?


4/42

Athough! the !o of demand gi"es us

some cues for answering the pre"ious

questions# howe"er! we need to oo$

beyond that aw to fashion more

compete answers and consequenty

better understand consumer behavior%

Accordingy! we ha"e to in"estigate the

determinants of demand%

Determinants of Demand


5/42

According to economists! a consumers

demand for a speci&c product is determined

by four factors'

1) (astes desire for this and other goods)2) (he consumers income%

3) (he consumers e*pectations for income!

prices! tastes)%

+) ,ther goods their a"aiabiity and prices)%

Determinants of Demand "con#


6/42

Tastes $%re ferences

-conomist obser"ed that the more

peasure a product gi"e us! the higher

the price wed be wiing to pay for it% -conomist use the tem uti!ity to refer

to the e*pected peasure or satisfaction!

obtained from goods or ser"ices%


7/42

. t i i t y(ota utiity (.) refers to the aggregate e"e of

satisfaction or fu&ment that a consumer

recei"es through the consumption of a speci&c product%

0argina utiity 0.) refers to the e*tra utiity a

consumer gets from one additiona unit of a speci&c

product% In a short period of time& the mar'ina!

uti!ity derived from successive units of a 'iven

product i!! dec!ine. This is (non as the !o of

diminishin' mar'ina! uti!ity.


8/42

TOTAL AND MARGINAL UTILITY

Tacosconsumed

per mea!

Tota!)ti!ity&

)ti!s

Mar'ina!)ti!ity&

)ti!s

0

1

0

10

)nits consumed per mea!


*0

20

+0

Tota!)ti!ity"u

ti!s#

Mar'ina!)ti!it

y"uti!s#

+0 , - 2 0/2

0 + 2 * - 1

+ 2 * - 1


9/42


Tacosconsumed

per mea!

Tota!)ti!ity&

)ti!s

Mar'ina!)ti!ity&

)ti!s

0

1

0

1010



*0

20

+0

Tota!)ti!ity"u

ti!s#

Mar'ina!)ti!it

y"uti!s#

+0 , - 2 0/2

0 + 2 * - 1

+ 2 * - 1


10/42


Tacosconsumed

per mea!

Tota!)ti!ity&

)ti!s

Mar'ina!)ti!ity&

)ti!s

0

1

2

0

10

18

10

8



*0

20

+0

Tota!)ti!ity"u

ti!s#

Mar'ina!)ti!it

y"uti!s#

+0 ,

- 2 0/2

0 + 2 * - 1

+ 2 * - 1


11/42


Tacosconsumed

per mea!

Tota!)ti!ity&

)ti!s

Mar'ina!)ti!ity&

)ti!s

0

1

2

3

0

10

18

24

10

8

60 + 2 * - 1



*0

20

+0

Tota!)ti!ity"u

ti!s#

Mar'ina!)ti!it

y"uti!s#

+0 ,

- 2 0/2

+ 2 * - 1


12/42


Tacosconsumed

per mea!

Tota!)ti!ity&

)ti!s

Mar'ina!)ti!ity&

)ti!s

0

1

2

3

4

0

10

18

24

28

10

8

6

4 )nits consumed per mea!


*0

20

+0

Tota!)ti!ity"u

ti!s#

Mar'ina!)ti!it

y"uti!s#

+0 ,

- 2 0/2

0 + 2 * - 1

+ 2 * - 1


13/42


Tacosconsumed

per mea!

Tota!)ti!ity&

)ti!s

Mar'ina!)ti!ity&

)ti!s

0

1

2

3

4

5

0

10

18

24

28

30

10

8

6

4

2



*0

20

+0

Tota!)ti!ity"u

ti!s#

Mar'ina!)ti!it

y"uti!s#

+0 ,

- 2 0/2

0 + 2 * - 1

+ 2 * - 1


14/42


Tacosconsumed

per mea!

Tota!)ti!ity&

)ti!s

Mar'ina!)ti!ity&

)ti!s

0

1

2

3

4

5

6

0

10

18

24

28

30

30

10

8

6

4

2

0



*0

20

+0

Tota!)ti!ity"u

ti!s#

Mar'ina!)ti!it

y"uti!s#

+0 ,

- 2 0/2

0 + 2 * - 1

+ 2 * - 1


15/42


Tacosconsumed

per mea!

Tota!)ti!ity&

)ti!s

Mar'ina!)ti!ity&

)ti!s

0

1

2

3

4

5

6

7

0

10

18

24

28

30

30

28

10

8

6

4

2

0

-2



*0

20

+0

Tota!)ti!ity"u

ti!s#

Mar'ina!)ti!it

y"uti!s#

+0 ,

- 2 0/2

TU

MU

0 + 2 * - 1

+ 2 * - 1


16/42


Tacosconsumed

per mea!

Tota!)ti!ity&

)ti!s

Mar'ina!)ti!ity&

)ti!s

0

1

2

3

4

5

6

7

0

10

18

24

28

30

30

28

10

8

6

4

2

0

-2



*0

20

+0

Tota!)ti!ity"u

ti!s#

Mar'ina!)ti!it

y"uti!s#

+0 ,

- 2 0/2

TU

MU

0 + 2 * - 1

+ 2 * - 1

ObserveDiminishing

MarginalUtility


17/42

Athough the theory of demand heps

e*pain consumer behavior! it is

insucient% n fact! in order to ha"e a

wider understanding we ha"e to

consider aso the easticity concept%


18/42

- a s t i c i t y

f a seer needs to reduce the price of aproduct! how much shoud it be reduced? educe too itte! and pro4ected increase in saes

wi not meet desired goas%

educe too much! and the pro4ected pro&ttarget might not be achie"ed%

(he economic concept here is priceeasticity of demand' how much quantitydemanded changes in response to a changein price%

5 i


19/42

5 r i c e- a s t i c i t y

(he !a of demand states thatquantity demanded wi increase

when the price is owered! and "ice"ersa%

(he critica question to be answeredis how muchquantity demanded wichange due to a price change%

5 r i c e


20/42

5rice easticity of demand' the percentagechange in quantity demanded di"ided bythe percentage change in price%

A 167 increase in quantity demanded in

response to a 267 price decrease yieds aprice easticity of 6%8%

%rice e!asticity "E# 3 chan'e in 4uantitydemanded

3chan'e in price

5 r i c e- a s t i c i t y


21/42

9omputing 5rice -asticity

We use the a"erage method ofcomputation'(a$e the quantity before and the quantity

after the price change and a"erage them% :i"ide the a"erage quantity into the change

in quantity to get the percentage change inquantity%

f quantity went from 2 to +! then thea"erage is 3% (he change is 2! so thepercentage change is 2;3 or 6%


22/42

9omputing 5rice -asticity con)

We do the same thing to get thepercentage change in price'

(a$e the price before and the price after anda"erage them%

:i"ide the a"erage price into the change inprice to get the percentage change in price%

f price went from +8 to +6! then thea"erage is +2%8% (he change is 8! so thepercentage change is 8;+2%8! or 6%11>%


23/42

9omputing 5rice -asticity con)

(he 7 change in quantity is 6%


24/42

n terpret ing - ast ic i ty

f E@ 1! demand is eastic% 9onsumer response is arge reati"e to the

price change%

f E 1! demand is ineastic% 9onsumer response is sma reati"e to the

price change%

f E 1! demand is unitary eastic% 7 change in quantity demanded is e*acty

equa to 7 change in price%


25/42

-asticity -stimates


26/42

2< of 2B

- as t i c i t y -* t remes 9ases

5erfecty -astic :emand:emand in which quantitydrops to Cero at the sightest

increase in price - )%

5erfecty neastic :emand

:emand in which quantitydemanded does not respond ata to a change in price -6)%


27/42

-asticity -*tremes 9ases
http://var/www/apps/conversion/video/Perfect%20Inelasticity%20and%20Perfect%20Elasticity%20of%20Demand.mp4http://var/www/apps/conversion/video/Perfect%20Inelasticity%20and%20Perfect%20Elasticity%20of%20Demand.mp4


28/42

2> of 2B

59- -DAE(9(F ,G :-0A:

A good way to remember the dierencebetween the two IperfectJ easticities is'

- ti it th


29/42

-asticity on the:emand 9ur"e

At ow prices!demand is reati"eyineastic% As prices

rise! howe"er!demand becomesess ineastic andmore eastic%

ote that totare"enue ma*es outwhen demandswitches from

eastic to ineastic%

(he :eterminants of -asticity


30/42

36 of 2B

(he :eterminants of -asticity

5erhaps the most ob"ious factor aecting demandeasticity is the a"aiabiity of substitutes%

AKADALD(F ,G E.LE((.(-E

-9-EE(-E Ks D.M.-E

:emand for necessities is reati"ey ineastice%g% gasoine)%:emand for u*uries is reati"ey eastic e%g%4ewery)%

(H- (0- :0-E,

The elasticity of demand in the short run may be very different from the elasticity of

demand in the long run. In the longer run, demand is likely to become more elastic, or

responsive, simply because households make adjustments over time and producers

develop substitute goods.

- ti it d ( t


31/42

31 of 2B

-asticity and (ota e"enu

TR= Px Q

total revenue = price x quantity

n any mar$et! P* Qis tota re"enue TR) recei"edby producers'

When price P) decines! quantity demanded Q:)

increases% (he two factors! Pand Q:! mo"e in

opposite directions'

Eects o price changes

on quantity demanded!

and

D

D

QP

QP

-astic ity and (ota e"enue con)


32/42

32 of 2B

Lecause tota re"enue is the product of P and Q!

whether TR rises or fas in response to a priceincrease depends on which is bigger! the percentageincrease in price or the percentage decrease inquantity demanded%

f the percentage decine in quantity demandedfoowing a price increase is arger than the percentageincrease in price! tota re"enue wi fa%

Effects of price increase on

a product with inelastic demand! = x

D

TRQP

Effects of price increase on

a product with elastic demand! = x D TRQP




33/42

33 of 2B

(he opposite is true for a price cut% When demand iseastic! a cut in price increases tota re"enues'

When demand is ineastic! a cut in price reduces totare"enues'

Effect of price cut on a product

with elastic demand: = x D TRQP

Effect of price cut on a productwith inelastic demand: = x D TRQP



34/42

56ect on Tota! 7evenu

If Demand is %rice Increase %rice Decrease

-astic -@1) :ecrease ncrease

neastic-1) ncrease :ecrease

.nitary eastic

-1)

o 9hange o 9hange


35/42

Appied -*ampes

Fou se cigarettes% Ehoud you put themon sae?

o% 9igarettes are ineastic goods% (otare"enue wi fa%

Fou se furniture or automobies% Ehoudyou put them on sae?

Fes% (hese are eastic goods% Aways ha"ethe appearance that your product is Ionsae%J (ota re"enue wi rise%


36/42

3< of 2B

-DAE(9(F ,G E.55DF

-asticity of Euppy A measure of theresponse of quantity of a 'ood supp!iedto a change in price of that good% Di$eyto be positi"e in output mar$ets%

priceinchange%

suppliedquantityinchange%supplyofelasticity =

,ther mportant -asticities con)


37/42

3= of 2B

,ther mportant -asticities

9,0- -DAE(9(F ,G :-0A:

ncome -asticity of :emand 0easuresthe responsi"eness of demand tochanges in income%

incomeinchange%

demandedquantityinchange%demandofelasticityincome =


38/42

3> of 2B

A norma product is a product thatconsumers buy 0,- when their

income rise e%g% cothes)%

An inferior product is a product thatconsumers buy D-EE when theirincome rise e%g% potato)%

orma Ks nferior 5roducts


39/42

(he 9onsumers ,ptima 9ombination

Nuestion'

When can we say that the consumer

ma8imi9es his uti!ity if he

consumes two products M and F!

whie respecting his budget

i bi i )


40/42

9onsumers ,ptima 9ombination con)

Answer'

According to the !a of uti!ity ma8imi9ation& a

consumer who buys both products M and F wi

ma*imiCe its utiity! when the margina utiity of

product M di"ided by the price of M is equa to the

margina utiity of F di"ided by price F%

M ) $ % M ) ; $ % ;

n other words! the consumer is in equiibrium when

the margina utiity per doar spent is the same for

a the products in his bas$et%

(h f tiit i i ti i h


41/42

(he ow of utiity ma*imiCation e*pains how

consumers decide to aocate their money so

that the ast doar spent on each purchased

product yieds the same amount of e*tra

margina) utiity%

A consumer is in equiibrium when utiity is

Ibaanced per doar) at the margin%J When

this is true! there is no incenti"e to ater the

e*penditure pattern uness tastes! income!

t is margina utiity per doar spent that is equaiCed#


42/42

t is margina utiity per doar spent that is equaiCed#

that is! consumers compare the e*tra utiity from

each product with its cost%

Documents

Microeconomics Ch 20.pptx