Demand Curves

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Demand Curves
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Do you own an iPod?

• Yes
• No

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Clicker Test

• Press the Letter A on your clicker.

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What is the most you would be willing to pay for
an iPod Nano? (if you didnt have an iPod and
couldnt get one for less)

• Less than 100
• 101-150
• 151-200
• 201-250
• 251-300
• 301-350
• 351-400
• 401-500
• 501-600
• More than 600

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Do you own an iPhone?

• Yes
• No

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What is the most you would be willing to pay for
an iPhone? (if you couldnt get one for less)

• Less than 100
• 101-200
• 201-300
• 301-400
• 401-500
• 501-600
• 601-700
• 701-800
• 801-1000
• More than 1000

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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?

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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.

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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.

Price
Quantity
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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 isnt of much
  use.)
• A demanders 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.

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Individual Demand Curve with reservation price
200
Price
200
Quantity
1
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A Market demand Curve
Price
300
200
100
10
25
35
Quantity
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If price is 10, how many units will be demanded?

• A) 0 units
• B) 11 units
• C) 21 units
• D) 32 units

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If price is 30, how many units will be demanded?

• A) 0 units
• B) 11 units
• C) 21 units
• D) 32 units

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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.

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Linear demand curve

• A useful example Linear demand curve.
• pa-bq for some a and b.
• Total expenditures on a
• Good are price x quantity.
• Note that pq(a-bq)qaq-bq2

Price
Quantity
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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.

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Individual demand for gasoline

• The higher the price of gasoline, the less
  gasoline per month someone will buy.

Price per gallon
Gallons Per month
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Market demand

• For any price, market demand is sum of
  quantities demanded by individuals.

Person 1 Demand Curve
Person 2 Demand Curve
Market demand Curve
Price
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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?

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Consumers surplus for consumer who demands
multiple goods.

• Area under demand curve, above the price.

Consumers Surplus
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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 dont know calculus, skip the calculus
  discussion on pp 2-11-2-14.)

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OK, Were out of here