Demand Analysis • • Demand Elasticity Supply Equilibrium
Behind the Demand Curve: Theory of Consumer Choice • Balance preferences and spending power • Weigh willingness to buy against ability to buy • Match desire to buy and ability to buy
Utility Theory • Goal of maximizing utility s. t. an income constraint – U = U(X, Y) – s. t. M = px. X + Py. Y • Consumers can rank preferences • Consumers have income to spend • There are goods to buy
Consumer Equilibrium • Maximize utility s. t. income constraint • Given limited budget and positive prices, reach highest level of utility • Income and substitution effects • Equilibrium implies: MUx/MUy = px/py
Consumer Choice Using Lagrangians • Deriving the decision rule with mathematics
Basis for Demand • Direct demand • Derived demand
The Demand Function • Determinants of demand • Qd = Qd (Po|T, C, I, Pn, R, E )
The Demand Curve • The amount of a good consumers are willing to buy at various prices • The maximum price consumers are willing to pay for a given amount of a good
The Concept of Elasticity • • Defined Formula Point v. arc elasticity The relationship between elasticity and slope
Nature of Elasticity • • • Perfectly elastic Elastic Unit elastic Inelastic Perfectly Inelastic
Issues in Elasticity • • Elasticity-revenue relationship Optimal pricing Straight-line demand curves MR = P(1 + 1/e)
Determinants of Price Elasticity • • Substitutability Complementary goods Relative importance in budget Time
Income Elasticity of Demand • • Superior goods Normal goods Inferior goods Giffen goods
Cross Elasticity of Demand • Substitutes • Complements
Basis for Supply • Supply decisions based on cost of production
Market Supply • Determinants of supply • Qs = Qs (Po|Pr, K, M)
The Supply Curve • The amount of a good suppliers are willing to provide at various prices • The minimum price suppliers are willing to accept to make a given amount of a good available
Market Equilibrium • Superimpose demand supply • If Qs = Qd, no tendency to change
Applications • Excise tax • Quotas and tariffs • Agricultural policy
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