LECTURE TWO DEMAND IMBA NCCU Managerial Economics Lecturer

LECTURE TWO: DEMAND IMBA NCCU Managerial Economics Lecturer: Jack Wu

INDIVIDUAL DEMAND CURVE, I Definition: graph of quantity that buyer will purchase at every possible price Construction -- “Other things equal, how many would you buy at a price of …. ? ’’ vertical axis -- price horizontal axis -- quantity

INDIVIDUAL DEMAND CURVE Price ($ per movie) 10. 00 7. 50 5. 00 2. 50 0. 00 Quantity (movies per month) 0 1 2 4 7

INDIVIDUAL DEMAND CURVE Price ($ per movie) 10 7. 50 individual demand curve 5 2. 50 0 1 2 4 Quantity (Movies a month) 7

TWO VIEWS for every possible price, it shows the quantity demanded for each unit of item, it shows the maximum price that the buyer is willing to pay

DEMAND CURVE: SLOPE diminishing marginal benefit -- each additional unit of consumption/usage provides less benefit than the preceeding unit demand curve slopes downward

CONSUMER DIFFERENCES individual preferences different demand curves changes in consumer's preferences, eg, age different consumers

HOOVER, 1992 A negative price case: Hoover’s special promotion -- two free air tickets (worth more than £ 400) for purchase of appliance over £ 100. q q promotion attracted over 100, 000 customers Hoover incurred £ 48 million loss

DEMAND INCOME Changes in income normal product – demand increases with income inferior product – demand falls with income

DEMAND OTHER FACTORS prices of related products substitutes complements advertising

COMPLEMENT Price ($ per movie) 10 demand curve with $1 popcorn 7. 50 5 demand curve with $1. 50 popcorn 2. 50 0 1 2 Quantity (Movies a month) 7

RECORDED MUSIC Argentina Canada CD purchases 0. 5 2. 6 cassette purchases 0. 2 0. 4 GDP/capita $9, 413 $19, 831 CD price $13. 80 $11. 55 cassette price $ 7. 80 $ 6. 06

RECORDED MUSIC Why the average Canadian bought more of both CDs and cassettes? Why the ratio of CD to cassette purchases was relatively higher in Canada?

RECORDED MUSIC Canadians enjoyed higher incomes Cassettes were a relatively inferior product compared to CDs Another possible explanation: difference in the relative prices of CDs and cassettes _ Canada: 11. 55/6. 06=1. 9 _ Argentina: 13. 80/7. 80=1. 77 * don’t not explain why Canadians bought relatively more CDs than Argentines.

FOOTBALL: TO BROADCAST? Live broadcasting of away games and attendance at home games are complements Live broadcasting of home games and attendance at home games are both substitutes and complements

USED CARS 1990 avg car age 1997/98 7. 5 yr 8. 7 yr median household income up 29. 9% avg new car price up 48. 4%

USED CARS Reasons for the increasing demand for used cars: _ fast rising price of new cars _ increasing quality of used cars _ auto manufacturer reduced frequency of changing designs _ financial institutions began to offer more favorable rates.

MARKET DEMAND Market demand = horizontal summation of individual demands

MARKET DEMAND Market demand = horizontal summation of individual demands Market Demand Factors --own price (move along the demand curve) --other factors (shift the demand curve) _ income level and distribution _ prices of related goods _ population _ demographics _ consumer tastes

BUYER SURPLUS individual buyer surplus: difference between consumer’s benefit and price she must pay for the item market buyer surplus: sum of individual buyer surpluses.

INDIVIDUAL BUYER SURPLUS Price ($ per movie) 10 individual buyer surplus at $2. 50 price 7. 50 d 5 c a b e individual demand (marginal benefit) curve f 2. 50 g h j 0 1 2 4 Quantity (Movies a month) 7

GAINS FROM PRICE CUT lower price on the quantity that he/she would have purchased at the original price (inframarginal units) he/she can buy more (marginal units) Case: Student discount price for movie

PACKAGE DEAL charge buyer just a little less than her/his total benefit leave buyer with almost zero surplus

TWO-PART TARIFF fixed payment usage charge fixed payment usage charge

BUSINESS DEMAND, I Business demands items as inputs into further production, not for consumption finished/semi-finished components - raw materials and energy labor and other services capital

BUSINESS DEMAND, II Demand for inputs depends on quantity of final output prices of complements and substitutes in production

BUSINESS DEMAND CURVE marginal benefit = increase in revenue arising from an additional unit of the input diminishing marginal benefit downwardsloping demand

AUTOMATED TELLER MACHINES increase in wages teller service became increasingly costly banks used ATMs to substitute for tellers compare India use of ATMs in US vs

GM: WHAT METAL TO USE? aluminium vis-à-vis steel auto weight fuel consumption emissions price

DISCUSSION QUESTION 1 In 1998, the value of worldwide sales of recorded music in the form of singles, music cassettes, and CDs was $38. 7 billion. Americans bought 3. 1 CDs and 0. 6 music cassette per capita, while Mexicans bought 0. 5 CD and 0. 3 music cassette per capita. Explain why per capita CD sales were relatively higher while per capita sales of music cassettes were relatively lower in the United States than in Mexico.

ANSWER Music CDs are a normal product, while music cassettes are an inferior product.

DISCUSSION QUESTION 1 CONTINUED On a suitable diagram, draw the U. S. demand for music CDs. Explain how the following changes would affect the demand curve: (i) increase in the price of CDs; (ii) rise in the ownership of CD players; and (iii) fall in the price of music cassettes.

ANSWER (i) Increase in the price of music CDs: movement along the demand curve; (ii) rise in CD player ownership: shift demand for CDs to the right; (iii) fall in the price of music cassettes: shift demand for CDs to the left.

DISCUSSION QUESTION 1 CONTINUED On another diagram, draw the demand for music CDs in Mexico. Explain how the following changes would affect the demand curve: (i) fall in advertising by music publishers such as Sony and Time Warner; (ii) reduction in the penalty for copyright infringement; and (iii) increase in the price of hamburgers.

DISCUSSION QUESTION 2. Between 2001 and 2003, China Mobile’s number of subscribers grew from 90. 6 to 141. 6 million as the company added subscribers and acquired service providers in the poorer inland regions of China. However, over the same period, its average revenue per user (APRU) fell from 141 to 102 yuan per month and its proportion of subscribers using pre-paid service rose from 48% to 64%.

DISCUSSION QUESTION 2 CONTINUED How would the entry of China Unicom affect the demand for China Mobile service? How would China Mobile’s provision of pre-paid service affect the demand for its post-paid (contract) service? Compare the demand for pre-paid service in the inland regions with that in the wealthier coastal regions. Relate your discussion in (b) and (c) to China Mobile’s decline in ARPU.

DISCUSSION QUESTION 3 The price of Chanel perfume is around $200 per fluid ounce, while the price of Arrowhead bottled water is $1 per gallon. Nancy buys 2 fluid ounces of Chanel and 10 gallons of bottled water a month.

DISCUSSION QUESTION 3 CONTINUED Using relevant demand curves, illustrate Nancy's choices. Illustrate how the following changes will affect Nancy's demand for Chanel perfume: (i) price increase to $220 per fluid ounce, and (ii) cut in price of another of Nancy's favorite perfumes. Nancy spends more money each month on perfume than bottled water. Does this necessarily mean that perfume gives her more total benefit than water? Use appropriate demand curves to address this question.