Chapter 4: Demand and . Relate the law of demand to the Cost-Benefit. . Discuss the relationship between the individual. demand curve and the market demand . Define and calculate consumer . Define price elasticity of demand and explain its. . Calculate price elasticity of demand using information. from the demand . Describe the relationship between price elasticity of. demand and total . Define cross-price elasticity of demand and income. elasticity of Hill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights reserved. Law of Demand.• Cost-Benefit Principle at work. – Do something if the marginal benefits are at least as. great as the marginal costs.• An increase in the market price approaches our. reservation price. – If market price exceeds the reservation price, buy no. more. – Costs include ALL costs – money, time, reputation. • Consider implicit and explicit costs Law of Demand. People do less of what they want to do. as the cost of doing it rises. 42 Origins of Demand.• Reservation price. – Individual tastes and preferences differ. Biological needs ■ Cultural influences. Peer behavior ■ Individual differences Perceived quality ■ Expected benefits – Tastes may change over time. • Macaroni and cheese. • Spinach.• New goods get incorporated into priorities. 43 Needs versus Wants.• Some goods are required for subsistence. – These are needs.• Beyond subsistence, behavior is driven by wants. – Kidneys or hamburger. – Oatmeal or toaster pastries.• Wants depend on price. – Water in California. • Regulations or price mechanism. – Regulations are cumbersome and expensive. – Price changes are fast and effective 44 Substitution at Work.• Substitution has powerful effects on our choices. – New car or used one. – Car pool or bus. – French restaurant, Chinese restaurant, cook at. home. – Soccer game or TV or read a book. – Go to movies or join Netflix or get cable TV. – Turn on the heat or put on a hoodie 45 Nominal and Real Prices.• Nominal price: the absolute price of a good in. terms of dollars. – The price you see on a good in a store.• Real price: the nominal price of a good relative. to the average dollar price of all other goods. – Real prices are adjusted for inflation. 46 Income Differences Matter.• Income is one of the determinants of demand. – "Free goods" have more takers in lower income. neighborhoods than in higher income areas. • The wait to get the free good is the price. – Waiting times in lower income areas will be longer. » Lower opportunity cost of the residents time. – Stores in higher income areas have lower waiting. times to pay for purchases. • The higher value of time causes these people to be. willing to pay for more store staff. 47 Individual and Market Demand. Curves.• The market demand is the horizontal sum of. individual demand curves. – At each possible price, add up the number of units. demanded by individuals to get the market demand. Smith Jones Market. 48 Identical Individual Demand. Curves.• In the special case where all buyers demand. exactly the same quantity at each price. – Multiply the individual quantity demanded by the. number of buyers to get
