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Lecture Microeconomics: Theory and applications (12/e): Chapter 4 - Browning, Zupan

Chapter 4 - Individual and market demand. In this chapter students will be able to: Understand how price changes affect consumption choices, differentiate between the income and substitution effects associated with a price change on the consumption of a particular good, explain the relation between income and substitution effects in the case of inferior goods. | MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 12th Edition, Copyright 2015 Chapter 4: Individual and Market Demand Prepared by Dr. Della Lee Sue, Marist College Learning Objectives Understand how price changes affect consumption choices. Differentiate between the income and substitution effects associated with a price change on the consumption of a particular good. Explain the relation between income and substitution effects in the case of inferior goods. Explain how individual demand curves are aggregated to obtain the market demand curve. (continued) Learning Objectives (continued) Demonstrate how consumer surplus represents the net benefit, or gain, to an individual from consuming one market basket instead of another. Investigate the relationship between own-price elasticity of demand and the price–consumption curve. Examine network effects: the extent to which an individual consumer’s demand for a good is influenced by other | MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 12th Edition, Copyright 2015 Chapter 4: Individual and Market Demand Prepared by Dr. Della Lee Sue, Marist College Learning Objectives Understand how price changes affect consumption choices. Differentiate between the income and substitution effects associated with a price change on the consumption of a particular good. Explain the relation between income and substitution effects in the case of inferior goods. Explain how individual demand curves are aggregated to obtain the market demand curve. (continued) Learning Objectives (continued) Demonstrate how consumer surplus represents the net benefit, or gain, to an individual from consuming one market basket instead of another. Investigate the relationship between own-price elasticity of demand and the price–consumption curve. Examine network effects: the extent to which an individual consumer’s demand for a good is influenced by other individuals’ purchases. Overview the basics of demand estimation. Derive the Consumer’s Demand Curve Mathematically. 4.1 PRICE CHANGES AND CONSUMPTION CHOICES Understand how price changes affect consumption choices. Price Changes and Consumption Choices Price-consumption curve: a curve that identifies the optimal market basket associated with each possible price of a good, holding constant all other determinants of demand. The consumer’s demand curve can be derived from the price-consumption curve. Figure 4.1 – Derivation of the Consumer’s Demand Curve Some Remarks about the Demand Curve The consumer’s level of well-being varies along the demand curve. The prices of other goods are held constant among a demand curve, but the quantities purchased of these other goods can vary. At each point on the demand curve, the consumer’s optimality condition is satisfied: MRSXO = PX/PO where “O” refers to “other goods” (composite good). The demand curve identifies the marginal .