Download Lecture 01.4

Econ 201
Lecture 1.5
Consumer Demand Theory
1-9-2009
Overview
• Marginal Value or Marginal Willingness-toPay
• First Law of Demand
• Total WTP, Total Amount Paid, Consumer
Surplus
First Law of Demand
• First law of demand,
– The lower a good’s price it, the greater the
quantity demanded (by an individual or the
market)
• Demand
– Entire schedule: quantity demanded at various prices
• Quantity demanded
– The amount demanded at a given price
From the Demand Side
• First Law of Demand
– What Does Law Of Demand
Mean?
– all other factors being equal, as
the price of a good or service
increases, consumer demand for
the good will decrease and vice
versa.
– http://www.investopedia.com/ter
ms/l/lawofdemand.asp
A Demand Example
Price
Individual's Demand Curve
Qty Demanded
$10.00
1
$9.00
2
$8.00
3
$7.00
4
$6.00
5
$5.00
6
$4.00
7
$3.00
8
$2.00
9
$1.00
10
Price per unit
$12.00
$10.00
$8.00
$6.00
Price
$4.00
$2.00
$0.00
1
2
3
4
5
6
7
Quantity Demanded
8
9
10
Consumer’s Marginal Value
• Some basic definitions
– Total Willingness-to-pay: “value in use”
• Maximum total amount you would be willing to pay for x units
of the good than go without?
– Equals the area under the demand curve up to x units
Individual's Demand Curve
Total Value of 4 uni
Price per unit
$12.00
$10.00
$8.00
$6.00
Price
$4.00
$2.00
$0.00
1
2
3
4
5
6
7
Quantity Demanded
8
9
10
All the things a demand curve tells
you about value of the good
Demand Curve is
Also Marginal Value
and Avg Revenue
Average Price (price
per unit)
Demand Curve
$12
$10
$8
$6
$4
$2
$0
CS
Amount Paid
1
2
3
4
5
6
7
Quantity Demanded
Total WTP =
CS + Amt Paid
8
9
10
In Class Example
Avg P*Qd
TV(Q-1)+MV(Q)
Tot Val- Tot Paid
Avg Pric Qty Dem Tot Amt Paid Tot Value (WTP) Marg Val Cons Surp
$10
1
$10
$10
$10
$0
$9
2
$18
$19
$9
$1
$8
3
$24
$27
$8
$3
$7
4
$28
$34
$7
$6
$6
5
$30
$40
$6
$10
$5
6
$30
$45
$5
$15
$4
7
$28
$49
$4
$21
$3
8
$24
$52
$3
$28
$2
9
$18
$54
$2
$36
$1
10
$10
$55
$1
$45
Also = Avg Rev
Also = MV(Q)
TV(Q)-TV(Q-1)
Total and Marginal Value
Price
Qty Demanded
Amt Paid
Marginal Value
Total Value
Price x Qty Dem
$10.00
1
$10.00
$10.00
$10.00
$9.00
2
$18.00
$9.00
$19.00
$8.00
3
$24.00
$8.00
$27.00
$7.00
4
$28.00
$7.00
$34.00
$6.00
5
$30.00
$6.00
$40.00
$5.00
6
$30.00
$5.00
$45.00
$4.00
7
$28.00
$4.00
$49.00
$3.00
8
$24.00
$3.00
$52.00
$2.00
9
$18.00
$2.00
$54.00
$1.00
10
$10.00
$1.00
$55.00
Area under Demand
Difference in
TV(3)-TV(2)
MV is also equal
to price paid
Buy Rules
• Consumer will buy a good as long as:
– Total Willingness-to-Pay > Amount Paid
• There is always some consumer surplus, or incentive for
consumer
• Consumer Surplus ≡ Difference () between maximum
amount that you are willing-to-pay and what you have to pay
– CS ≡ Total WTP – Average Price x Qty Purhased
• Consumer will choose how much to buy
(quantity demanded):
– Marginal Value >= price paid for the last unit
• For Perfect Competition: price same for all units -> price paid
for last unit = average price
What Does a Demand
Curve Tell You?
• A Demand Curve is also
– A Marginal Value Curve
• Tells you what the consumer’s marginal value of
the last (incremental/additional) unit is
– An Average Revenue Curve
• Tells you what the average price needs to be in
order to sell x units