tailieunhanh - 15. Principles of Economics (Brief Edition)_2e (4)

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