Quản trị kinh doanh - Chapter 5: The theory of demand

1The Theory of DemandChapter 5Copyright (c)2014 John Wiley & Sons, Inc.2Chapter Five OverviewIndividual Demand CurvesIncome and Substitution Effects & the Slope of DemandApplications: The Work-Leisure Trade-offConsumer SurplusConstructing Market DemandChapter FiveCopyright (c)2014 John Wiley & Sons, Inc.3Chapter Five OverviewThe Effects of a Change in PriceOptimal ChoiceDemand CurveChapter FiveCopyright (c)2014 John Wiley & Sons, Inc.4Individual Demand CurvesIn Chapter 4, consumer’s optimal basket was determined.Thus, we can tell – for a given income and prices of other goods – how much a consumer will demand of X for a given price of X.This is a point on the consumer’s demand curve.We can find more points on the demand curve for X by changing the price of X and determining how much of X the consumer will demand – prices of other goods and income are held constant.Chapter FiveCopyright (c)2014 John Wiley & Sons, Inc.5Is the set of optimal baskets for every possible price of good x, holding all other prices and income constant.The Price Consumption Curve of Good X:Chapter FiveIndividual Demand CurvesCopyright (c)2014 John Wiley & Sons, Inc.6Y (units)X (units)0PX = 4PX = 2PX = 1XA=2XB=10XC=16•••10PY = $4I = $40Price Consumption Curve20The price consumption curve for good x can be written as the quantity consumed of good x for any price of x. This is the individual’s demand curve for good x.Chapter FivePrice Consumption CurvesCopyright (c)2014 John Wiley & Sons, Inc.7XPXXA XB XCIndividual Demand CurveFor XPX = 4PX = 2PX = 1•••U increasingChapter FiveIndividual Demand CurveCopyright (c)2014 John Wiley & Sons, Inc.8 The consumer is maximizing utility at every point along the demand curve The marginal rate of substitution falls along the demand curve as the price of x falls (if there was an interior solution). As the price of x falls, it causes the consumer to move down and to the right along the demand curve as utility increases in that direction.The demand curve is also the “willingness to pay” curve – and willingness to pay for an additional unit of X falls as more X is consumed.Chapter FiveIndividual Demand CurveKey PointsCopyright (c)2014 John Wiley & Sons, Inc.9Algebraically, we can solve for the individual’s demand using the following equations:1. pxx + pyy = I2. MUx/px = MUy/py – at a tangency.(If this never holds, a corner point may be substituted where x = 0 or y = 0)Chapter FiveDemand Curve for “X”Copyright (c)2014 John Wiley & Sons, Inc.10We Have: 1. pxx + pyy = I2. x/py = y/pxSubstituting the second condition into the budget constraint, we then have: 3. pxx + py(px/py)x = I orx = I/2pxChapter FiveDemand Curve with an Interior SolutionSuppose that U(x,y) = xy. MUx = y and MUy = x. The prices of x and y are px and py, respectively and income = I.Copyright (c)2014 John Wiley & Sons, Inc.11Chapter FiveChange in Income & DemandThe income consumption curve of good x is the set of optimal baskets for every possible level of income.We can graph the points on the income consumption curve as points on a shifting demand curve.Income Consumption CurveCopyright (c)2014 John Wiley & Sons, Inc.12Chapter FiveIncome Consumption CurveCopyright (c)2014 John Wiley & Sons, Inc.13The income consumption curve for good x also can be written as the quantity consumed of good x for any income level. This is the individual’s Engel Curve for good x. When the income consumption curve is positively sloped, the slope of the Engel Curve is positive.Chapter FiveEngel CurvesCopyright (c)2014 John Wiley & Sons, Inc.14X (units)092684010 18 24Engel CurveChapter FiveI ($)“X is a normal good”Engel CurvesCopyright (c)2014 John Wiley & Sons, Inc.15• If the income consumption curve shows that the consumer purchases more of good x as her income rises, good x is a normal good. • Equivalently, if the slope of the Engel curve is positive, the good is a normal good.• If the income consumption curve shows that the consumer purchases less of good x as her income rises, good x is an inferior good. • Equivalently, if the slope of the Engel curve is negative, the good is an inferior good.Chapter FiveDefinitions of GoodsCopyright (c)2014 John Wiley & Sons, Inc.16Example: Backward Bending Engel Curve – a good can be normal over some ranges and inferior over othersChapter FiveDefinitions of GoodsCopyright (c)2014 John Wiley & Sons, Inc.17Chapter FiveImpact of Change in the Price of a GoodSubstitution Effect: Relative change in price affects the amount of good that is bought as consumer tries to achieve the same level of utilityIncome Effect: Consumer’s purchasing power changes and affects the consumer in a way similar to effect of a change in incomeCopyright (c)2014 John Wiley & Sons, Inc.18 As the price of x falls, all else constant, good x becomes cheaper relative to good y. This change in relative prices alone causes the consumer to adjust his/ her consumption basket. This effect is called the substitution effect. The substitution effect always is negative. Usually, a move along a demand curve will be composed of both effects.Chapter FiveThe Substitution EffectCopyright (c)2014 John Wiley & Sons, Inc.19Chapter FiveImpact of Change in the Price of a GoodDefinition: As the price of x falls, all else constant, purchasing power rises. As the price of x rises, all else constant, purchasing power falls. This is called the income effect of a change in price.The income effect may be positive (normal good) or negative (inferior good).Copyright (c)2014 John Wiley & Sons, Inc.20Chapter FiveImpact of Change in the Price of a GoodIf price of a good falls – consumer substitutes into the good to achieve the same level of utilityWhen price falls – purchasing power increases the consumer can buy the same amount and still have money leftCopyright (c)2014 John Wiley & Sons, Inc.YClothingXFoodACBXAXCXBBL1BL2BLdU1U2Initial BasketFinal BasketDecomposition BasketThe Substitution and Income EffectsCopyright (c)2014 John Wiley & Sons, Inc.2122Chapter FiveThe Substitution and Income EffectsCopyright (c)2014 John Wiley & Sons, Inc.YClothingXFoodACBXAXCXBBL1BL2BLdU1U2Initial Basket AFinal Basket CDecomposition Basket BThe Substitution and Income EffectsCopyright (c)2014 John Wiley & Sons, Inc.2324Chapter FiveThe Substitution and Income EffectsCopyright (c)2014 John Wiley & Sons, Inc.25Chapter FiveGiffen GoodsIf a good is so inferior that the net effect of a price decrease of good x, all else constant, is a decrease in consumption of good x, good x is a Giffen good.For Giffen goods, demand does not slope down.When might an income effect be large enough to offset the substitution effect? The good would have to represent a very large proportion of the budget.Copyright (c)2014 John Wiley & Sons, Inc.26Chapter FiveGiffen Goods – Income and Substitution EffectsCopyright (c)2014 John Wiley & Sons, Inc.27Chapter FiveExample – Income and Substitution EffectsSuppose U(x,y) = xy  MUx = y, MUy = xPy = $1/unit and I = $72Suppose that Px1 = $9/unit. What is the (initial) optimal consumption basket?Tangency Condition: MUx/MUy = Px/Py  y = 9xConstraint: Pxx + Pyy = I  9x + y = 72Solving: x = 4 and y = 36Example:Copyright (c)2014 John Wiley & Sons, Inc.28Chapter FiveExample – Income and Substitution EffectsSuppose U(x,y) = XY  MUx = y, MUy = xPy = $1/unit and I = $72Suppose that price of x falls and Px2 = $4/unit. What is the (final) optimal consumption basket?Tangency Condition: MUx/MUy = Px/Py  y = 4xConstraint: Pxx + Pyy = I  4x + y = 72Solving: x = 9 and y = 36Example:Copyright (c)2014 John Wiley & Sons, Inc.29Chapter FiveExample – Income and Substitution EffectsFind the decomposition basket B.It must lie on the original indifference curve U1 along with basket A  U1 = XY = 4(36) = 144.It must lie at the point where the decomposition budget line is tangent to the indifference curve.Price of X (PX) on the decomposition budget line is final price of $4.Tangency Condition: MUx/MUy = Px/Py  y = 4xCombined with XY = 144  x = 6, y = 24Substitution Effect: 6 – 4 = 2 units of XIncome Effect: 9 – 6 = 3 units of XCopyright (c)2014 John Wiley & Sons, Inc.30Chapter FiveConsumer Surplus The individual’s demand curve can be seen as the individual’s willingness to pay curve. On the other hand, the individual must only actually pay the market price for (all) the units consumed.Consumer Surplus is the difference between what the consumer is willing to pay and what the consumer actually pays.Copyright (c)2014 John Wiley & Sons, Inc.31Chapter FiveConsumer SurplusDefinition: The net economic benefit to the consumer due to a purchase (i.e. the willingness to pay of the consumer net of the actual expenditure on the good) is called consumer surplus. The area under an ordinary demand curve and above the market price provides a measure of consumer surplusCopyright (c)2014 John Wiley & Sons, Inc.32Chapter FiveConsumer SurplusG = .5(10-3)(28) = 98H+I= 28 +2 = 30CS2 = .5(10-2)(32) = 128CSP = (10-P)(40-4P)Copyright (c)2014 John Wiley & Sons, Inc.33Chapter FiveMarket DemandThe market demand function is the horizontal sum of the individual (or segment) demands. In other words, market demand is obtained by adding the quantities demanded by the individuals (or segments) at each price and plotting this total quantity for all possible prices.Copyright (c)2014 John Wiley & Sons, Inc.34Q = 10 - PSegment 1Q = 20 – 5PSegment 2Market demand410QQQPPPChapter FiveMarket DemandCopyright (c)2014 John Wiley & Sons, Inc.If one consumer's demand for a good changes with the number of other consumers who buy the good, there are network externalities.Network ExternalitiesCopyright (c)2014 John Wiley & Sons, Inc.35Bandwagon effect: A positive network externality that refers to the increase in each consumer’s demand for a good as more consumers buy the goodNetwork ExternalitiesCopyright (c)2014 John Wiley & Sons, Inc.36PXD30D60Market Demand•••ABC201060PurePriceEffectBandwagon EffectBandwagon Effect: (increased quantity demanded when more consumers purchase)Network ExternalitiesCopyright (c)2014 John Wiley & Sons, Inc.37Snob effect: A negative network externality that refers to the decrease in each consumer’s demand as more consumers buy the goodNetwork ExternalitiesCopyright (c)2014 John Wiley & Sons, Inc.38X (units)PXMarket Demand••AC900D1000D1300•BPure Price EffectSnob EffectSnob Effect: (decreased quantity demanded when more consumers purchase)Network ExternalitiesCopyright (c)2014 John Wiley & Sons, Inc.39Divide the day into two parts: Work hours and leisure (non work) hours.Earns income during work hours and uses the income to pay for activities he enjoys in his leisure time.Labor-Leisure Trade-offCopyright (c)2014 John Wiley & Sons, Inc.40Total Daily income:w(24-L) where w is the hourly wage rateL is the leisure hours24 is the 24 hours in a dayDefining Labor SupplyCopyright (c)2014 John Wiley & Sons, Inc.41An increase in wage rate reduces the amount of labor required to buy a unit of the composite goodThis leads to both a Substitution effect and Income effect.Supply of LaborCopyright (c)2014 John Wiley & Sons, Inc.42The labor supply curve slopes upward over the region where the substitution effect associated with the wage increase outweighs the income effect, but bends backward over the region where the income effect outweighs the substitution effect.Labor Supply CurveCopyright (c)2014 John Wiley & Sons, Inc.43Labor Supply CurveCopyright (c)2014 John Wiley & Sons, Inc.44