Consumer Equilibrium and Market Demand

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ConsumerEquilibriumand MarketDemand

• Chapter 4

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Measurement andInterpretation ofConsumer
Equilibrium
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Consumer Equilibrium
Must find the point where where utility is
maximized subject to the budget constraint. This
occurs where MUHAMBURGERS MUTACOS
PHAMBURGERS PTACOS

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Consumer Equilibrium
Must find the point where where utility is
maximized subject to the budget constraint. This
occurs where MUHAMBURGERS MUTACOS
PHAMBURGERS PTACOS

In other words, the marginal utility derived from
the last dollar spent on each good is identical.
This can be expanded to include all goods and
services purchased by the consumer.
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Consumer Equilibrium
Utility is maximized by buying 5 tacos _at_
0.50 and 2 hamburgers _at_ 1.25 given a budget
constraint of 5.00 per week.
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Consumer Equilibrium
Points B and D exceed the budget
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Consumer Equilibrium
Point C does not maximize utility
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Effects of Changes in Price of the Product
Lets look at the impact of three separate price
levels (5.00, 1.25 and 1.00) on this
consumers weekly purchases of hamburgers
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Effects of Changes in Price of the Product
A price decrease of hamburger prices to 1.00
would cause Carl to increase his weekly purchases
Of hamburgers from 2 to 3.
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Effects of Changes in Price of the Product
If the price instead increases to 5.00, Carl
would only want one-half a hamburger per week
(would you believe 1 hamburger every other week?)
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Effects of Changes in Price of the Product
Line CAB forms a consumer demand schedule,
showing how the consumer would respond to changes
in the price of hamburgers.
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Effects of Changes in Available Income
Original equilibrium
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Effects of Changes in Available Income
Both hamburgers and tacos are normal goods as
income increased from 5 to 6 per week.
Original equilibrium
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Effects of Changes in Available Income
But tacos became an inferior good however
when income increased to 8 per week. As
income increased , taco consumption fell .
Original equilibrium
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Engel curve for tacos
Engel curve for hamburgers
Normal good as the budget increases from 5 to 8
Inferior good as the budget increases from 6 to
8
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Measurement andInterpretation ofMarket Demand
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The market demand curve for a particular product
can be seen as a horizontal summation of the
demand schedules for all the consumers in the
market. At a price of 1.50, Paula would buy 2
hamburgers per week while Beth would buy one.
Therefore, the market demand is equal to 3
hamburgers!
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Some Important Jargon
When discussing events in the market
place, economists use specific terms to
distinguish between movement along a demand curve
and a shift in a demand curve.
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Some Important Jargon
When discussing events in the market
place, economists use specific terms to
distinguish between movement along a demand curve
and a shift in a demand curve. A movement along
a demand curve is referred to as a change in the
quantity demanded.
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Some Important Jargon
When discussing events in the market
place, economists use specific terms to
distinguish between movement along a demand curve
and a shift in a demand curve. A movement along
a demand curve is referred to as a change in the
quantity demanded. A shift in the demand
curve, on the other hand, is referred to as a
change in demand.
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Movement from point A to C is called a change in
demand
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Movement from point A to B is called a change in
the quantity demanded
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Concept of Consumer Surplus
An important extension of the market demand
curve is the concept of consumer surplus, or
economic well being consumers derive in the
market. The demand curve reveals the willingness
of consumers to pay a certain price for a
corresponding quantity.
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Concept of Consumer Surplus
An important extension of the market demand
curve is the concept of consumer surplus, or
economic well being consumers derive in the
market. The demand curve reveals the willingness
of consumers to pay a certain price for a
corresponding quantity. They are willing to pay
a higher price for a lesser quantity, but do not
have to given the level of supply coming onto the
market in a given period. Thus, they realize a
savings.
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Concept of Consumer Surplus
An important extension of the market demand
curve is the concept of consumer surplus, or
economic well being consumers derive in the
market. The demand curve reveals the willingness
of consumers to pay a certain price for a
corresponding quantity. They are willing to pay
a higher price for a lesser quantity, but do not
have to given the level of supply coming onto the
market in a given period. Thus, they realize a
savings. We will use this concept later in
Chapter 10 when we discuss market equilibrium.
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Area ABC is the consumer surplus if price is 6.
The demand curve implies they were willing to pay
10 for the 1st unit, 9 for the second unit,
etc. But they only had to pay 6 each for all 5
units!
F
G
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Area DACE is the gain in consumer surplus if the
price falls to 5
F
G
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