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8/12/2019 Microeconomics Ch 20.pptx
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M i c r o e c o n o m i c
s
Dr. Karim Kobeissi
8/12/2019 Microeconomics Ch 20.pptx
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C h a p t e r 2 0 : T h eD e m a n d f o r G o o d s
8/12/2019 Microeconomics Ch 20.pptx
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I n t r o d u c t i o n
Have you ever onder:
1) How do consumers decide how much of any good to buy?
2) How does a change in a products price aect the
quantity they purchase or the amount of money they
spend on it ?
3) Why do consumers buy certain products but not others?
8/12/2019 Microeconomics Ch 20.pptx
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Athough! the !o of demand gi"es us
some cues for answering the pre"ious
questions# howe"er! we need to oo$
beyond that aw to fashion more
compete answers and consequenty
better understand consumer behavior%
Accordingy! we ha"e to in"estigate the
determinants of demand%
Determinants of Demand
8/12/2019 Microeconomics Ch 20.pptx
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According to economists! a consumers
demand for a speci&c product is determined
by four factors'
1) (astes desire for this and other goods)2) (he consumers income%
3) (he consumers e*pectations for income!
prices! tastes)%
+) ,ther goods their a"aiabiity and prices)%
Determinants of Demand "con#
8/12/2019 Microeconomics Ch 20.pptx
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Tastes $%re ferences
-conomist obser"ed that the more
peasure a product gi"e us! the higher
the price wed be wiing to pay for it% -conomist use the tem uti!ity to refer
to the e*pected peasure or satisfaction!
obtained from goods or ser"ices%
8/12/2019 Microeconomics Ch 20.pptx
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. t i i t y(ota utiity (.) refers to the aggregate e"e of
satisfaction or fu&ment that a consumer
recei"es through the consumption of a speci&c product%
0argina utiity 0.) refers to the e*tra utiity a
consumer gets from one additiona unit of a speci&c
product% In a short period of time& the mar'ina!
uti!ity derived from successive units of a 'iven
product i!! dec!ine. This is (non as the !o of
diminishin' mar'ina! uti!ity.
8/12/2019 Microeconomics Ch 20.pptx
8/42
TOTAL AND MARGINAL UTILITY
Tacosconsumed
per mea!
Tota!)ti!ity&
)ti!s
Mar'ina!)ti!ity&
)ti!s
0
1
0
10
)nits consumed per mea!
)nits consumed per mea!
*0
20
+0
Tota!)ti!ity"u
ti!s#
Mar'ina!)ti!it
y"uti!s#
+0 , - 2 0/2
0 + 2 * - 1
+ 2 * - 1
8/12/2019 Microeconomics Ch 20.pptx
9/42
TOTAL AND MARGINAL UTILITY
Tacosconsumed
per mea!
Tota!)ti!ity&
)ti!s
Mar'ina!)ti!ity&
)ti!s
0
1
0
1010
)nits consumed per mea!
)nits consumed per mea!
*0
20
+0
Tota!)ti!ity"u
ti!s#
Mar'ina!)ti!it
y"uti!s#
+0 , - 2 0/2
0 + 2 * - 1
+ 2 * - 1
8/12/2019 Microeconomics Ch 20.pptx
10/42
TOTAL AND MARGINAL UTILITY
Tacosconsumed
per mea!
Tota!)ti!ity&
)ti!s
Mar'ina!)ti!ity&
)ti!s
0
1
2
0
10
18
10
8
)nits consumed per mea!
)nits consumed per mea!
*0
20
+0
Tota!)ti!ity"u
ti!s#
Mar'ina!)ti!it
y"uti!s#
+0 ,
- 2 0/2
0 + 2 * - 1
+ 2 * - 1
8/12/2019 Microeconomics Ch 20.pptx
11/42
TOTAL AND MARGINAL UTILITY
Tacosconsumed
per mea!
Tota!)ti!ity&
)ti!s
Mar'ina!)ti!ity&
)ti!s
0
1
2
3
0
10
18
24
10
8
60 + 2 * - 1
)nits consumed per mea!
)nits consumed per mea!
*0
20
+0
Tota!)ti!ity"u
ti!s#
Mar'ina!)ti!it
y"uti!s#
+0 ,
- 2 0/2
+ 2 * - 1
8/12/2019 Microeconomics Ch 20.pptx
12/42
TOTAL AND MARGINAL UTILITY
Tacosconsumed
per mea!
Tota!)ti!ity&
)ti!s
Mar'ina!)ti!ity&
)ti!s
0
1
2
3
4
0
10
18
24
28
10
8
6
4 )nits consumed per mea!
)nits consumed per mea!
*0
20
+0
Tota!)ti!ity"u
ti!s#
Mar'ina!)ti!it
y"uti!s#
+0 ,
- 2 0/2
0 + 2 * - 1
+ 2 * - 1
8/12/2019 Microeconomics Ch 20.pptx
13/42
TOTAL AND MARGINAL UTILITY
Tacosconsumed
per mea!
Tota!)ti!ity&
)ti!s
Mar'ina!)ti!ity&
)ti!s
0
1
2
3
4
5
0
10
18
24
28
30
10
8
6
4
2
)nits consumed per mea!
)nits consumed per mea!
*0
20
+0
Tota!)ti!ity"u
ti!s#
Mar'ina!)ti!it
y"uti!s#
+0 ,
- 2 0/2
0 + 2 * - 1
+ 2 * - 1
8/12/2019 Microeconomics Ch 20.pptx
14/42
TOTAL AND MARGINAL UTILITY
Tacosconsumed
per mea!
Tota!)ti!ity&
)ti!s
Mar'ina!)ti!ity&
)ti!s
0
1
2
3
4
5
6
0
10
18
24
28
30
30
10
8
6
4
2
0
)nits consumed per mea!
)nits consumed per mea!
*0
20
+0
Tota!)ti!ity"u
ti!s#
Mar'ina!)ti!it
y"uti!s#
+0 ,
- 2 0/2
0 + 2 * - 1
+ 2 * - 1
8/12/2019 Microeconomics Ch 20.pptx
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TOTAL AND MARGINAL UTILITY
Tacosconsumed
per mea!
Tota!)ti!ity&
)ti!s
Mar'ina!)ti!ity&
)ti!s
0
1
2
3
4
5
6
7
0
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
)nits consumed per mea!
)nits consumed per mea!
*0
20
+0
Tota!)ti!ity"u
ti!s#
Mar'ina!)ti!it
y"uti!s#
+0 ,
- 2 0/2
TU
MU
0 + 2 * - 1
+ 2 * - 1
8/12/2019 Microeconomics Ch 20.pptx
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TOTAL AND MARGINAL UTILITY
Tacosconsumed
per mea!
Tota!)ti!ity&
)ti!s
Mar'ina!)ti!ity&
)ti!s
0
1
2
3
4
5
6
7
0
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
)nits consumed per mea!
)nits consumed per mea!
*0
20
+0
Tota!)ti!ity"u
ti!s#
Mar'ina!)ti!it
y"uti!s#
+0 ,
- 2 0/2
TU
MU
0 + 2 * - 1
+ 2 * - 1
ObserveDiminishing
MarginalUtility
8/12/2019 Microeconomics Ch 20.pptx
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Athough the theory of demand heps
e*pain consumer behavior! it is
insucient% n fact! in order to ha"e a
wider understanding we ha"e to
consider aso the easticity concept%
8/12/2019 Microeconomics Ch 20.pptx
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- a s t i c i t y
f a seer needs to reduce the price of aproduct! how much shoud it be reduced? educe too itte! and pro4ected increase in saes
wi not meet desired goas%
educe too much! and the pro4ected pro&ttarget might not be achie"ed%
(he economic concept here is priceeasticity of demand' how much quantitydemanded changes in response to a changein price%
5 i
8/12/2019 Microeconomics Ch 20.pptx
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5 r i c e- a s t i c i t y
(he !a of demand states thatquantity demanded wi increase
when the price is owered! and "ice"ersa%
(he critica question to be answeredis how muchquantity demanded wichange due to a price change%
5 r i c e
8/12/2019 Microeconomics Ch 20.pptx
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5rice easticity of demand' the percentagechange in quantity demanded di"ided bythe percentage change in price%
A 167 increase in quantity demanded in
response to a 267 price decrease yieds aprice easticity of 6%8%
%rice e!asticity "E# 3 chan'e in 4uantitydemanded
3chan'e in price
5 r i c e- a s t i c i t y
8/12/2019 Microeconomics Ch 20.pptx
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9omputing 5rice -asticity
We use the a"erage method ofcomputation'(a$e the quantity before and the quantity
after the price change and a"erage them% :i"ide the a"erage quantity into the change
in quantity to get the percentage change inquantity%
f quantity went from 2 to +! then thea"erage is 3% (he change is 2! so thepercentage change is 2;3 or 6%
8/12/2019 Microeconomics Ch 20.pptx
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9omputing 5rice -asticity con)
We do the same thing to get thepercentage change in price'
(a$e the price before and the price after anda"erage them%
:i"ide the a"erage price into the change inprice to get the percentage change in price%
f price went from +8 to +6! then thea"erage is +2%8% (he change is 8! so thepercentage change is 8;+2%8! or 6%11>%
8/12/2019 Microeconomics Ch 20.pptx
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9omputing 5rice -asticity con)
(he 7 change in quantity is 6%
8/12/2019 Microeconomics Ch 20.pptx
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n terpret ing - ast ic i ty
f E@ 1! demand is eastic% 9onsumer response is arge reati"e to the
price change%
f E 1! demand is ineastic% 9onsumer response is sma reati"e to the
price change%
f E 1! demand is unitary eastic% 7 change in quantity demanded is e*acty
equa to 7 change in price%
8/12/2019 Microeconomics Ch 20.pptx
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-asticity -stimates
8/12/2019 Microeconomics Ch 20.pptx
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2< of 2B
- as t i c i t y -* t remes 9ases
5erfecty -astic :emand:emand in which quantitydrops to Cero at the sightest
increase in price - )%
5erfecty neastic :emand
:emand in which quantitydemanded does not respond ata to a change in price -6)%
8/12/2019 Microeconomics Ch 20.pptx
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-asticity -*tremes 9ases
http://var/www/apps/conversion/video/Perfect%20Inelasticity%20and%20Perfect%20Elasticity%20of%20Demand.mp4http://var/www/apps/conversion/video/Perfect%20Inelasticity%20and%20Perfect%20Elasticity%20of%20Demand.mp48/12/2019 Microeconomics Ch 20.pptx
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2> of 2B
59- -DAE(9(F ,G :-0A:
A good way to remember the dierencebetween the two IperfectJ easticities is'
- ti it th
8/12/2019 Microeconomics Ch 20.pptx
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-asticity on the:emand 9ur"e
At ow prices!demand is reati"eyineastic% As prices
rise! howe"er!demand becomesess ineastic andmore eastic%
ote that totare"enue ma*es outwhen demandswitches from
eastic to ineastic%
(he :eterminants of -asticity
8/12/2019 Microeconomics Ch 20.pptx
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36 of 2B
(he :eterminants of -asticity
5erhaps the most ob"ious factor aecting demandeasticity is the a"aiabiity of substitutes%
AKADALD(F ,G E.LE((.(-E
-9-EE(-E Ks D.M.-E
:emand for necessities is reati"ey ineastice%g% gasoine)%:emand for u*uries is reati"ey eastic e%g%4ewery)%
(H- (0- :0-E,
The elasticity of demand in the short run may be very different from the elasticity of
demand in the long run. In the longer run, demand is likely to become more elastic, or
responsive, simply because households make adjustments over time and producers
develop substitute goods.
- ti it d ( t
8/12/2019 Microeconomics Ch 20.pptx
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31 of 2B
-asticity and (ota e"enu
TR= Px Q
total revenue = price x quantity
n any mar$et! P* Qis tota re"enue TR) recei"edby producers'
When price P) decines! quantity demanded Q:)
increases% (he two factors! Pand Q:! mo"e in
opposite directions'
Eects o price changes
on quantity demanded!
and
D
D
QP
QP
-astic ity and (ota e"enue con)
8/12/2019 Microeconomics Ch 20.pptx
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32 of 2B
Lecause tota re"enue is the product of P and Q!
whether TR rises or fas in response to a priceincrease depends on which is bigger! the percentageincrease in price or the percentage decrease inquantity demanded%
f the percentage decine in quantity demandedfoowing a price increase is arger than the percentageincrease in price! tota re"enue wi fa%
Effects of price increase on
a product with inelastic demand! = x
D
TRQP
Effects of price increase on
a product with elastic demand! = x D TRQP
-astic ity and (ota e"enue con)
-astic ity and (ota e"enue con)
8/12/2019 Microeconomics Ch 20.pptx
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33 of 2B
(he opposite is true for a price cut% When demand iseastic! a cut in price increases tota re"enues'
When demand is ineastic! a cut in price reduces totare"enues'
Effect of price cut on a product
with elastic demand: = x D TRQP
Effect of price cut on a productwith inelastic demand: = x D TRQP
-astic ity and (ota e"enue con)
8/12/2019 Microeconomics Ch 20.pptx
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56ect on Tota! 7evenu
If Demand is %rice Increase %rice Decrease
-astic -@1) :ecrease ncrease
neastic-1) ncrease :ecrease
.nitary eastic
-1)
o 9hange o 9hange
8/12/2019 Microeconomics Ch 20.pptx
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Appied -*ampes
Fou se cigarettes% Ehoud you put themon sae?
o% 9igarettes are ineastic goods% (otare"enue wi fa%
Fou se furniture or automobies% Ehoudyou put them on sae?
Fes% (hese are eastic goods% Aways ha"ethe appearance that your product is Ionsae%J (ota re"enue wi rise%
8/12/2019 Microeconomics Ch 20.pptx
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3< of 2B
-DAE(9(F ,G E.55DF
-asticity of Euppy A measure of theresponse of quantity of a 'ood supp!iedto a change in price of that good% Di$eyto be positi"e in output mar$ets%
priceinchange%
suppliedquantityinchange%supplyofelasticity =
,ther mportant -asticities con)
8/12/2019 Microeconomics Ch 20.pptx
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3= of 2B
,ther mportant -asticities
9,0- -DAE(9(F ,G :-0A:
ncome -asticity of :emand 0easuresthe responsi"eness of demand tochanges in income%
incomeinchange%
demandedquantityinchange%demandofelasticityincome =
8/12/2019 Microeconomics Ch 20.pptx
38/42
3> of 2B
A norma product is a product thatconsumers buy 0,- when their
income rise e%g% cothes)%
An inferior product is a product thatconsumers buy D-EE when theirincome rise e%g% potato)%
orma Ks nferior 5roducts
8/12/2019 Microeconomics Ch 20.pptx
39/42
(he 9onsumers ,ptima 9ombination
Nuestion'
When can we say that the consumer
ma8imi9es his uti!ity if he
consumes two products M and F!
whie respecting his budget
i bi i )
8/12/2019 Microeconomics Ch 20.pptx
40/42
9onsumers ,ptima 9ombination con)
Answer'
According to the !a of uti!ity ma8imi9ation& a
consumer who buys both products M and F wi
ma*imiCe its utiity! when the margina utiity of
product M di"ided by the price of M is equa to the
margina utiity of F di"ided by price F%
M ) $ % M ) ; $ % ;
n other words! the consumer is in equiibrium when
the margina utiity per doar spent is the same for
a the products in his bas$et%
(h f tiit i i ti i h
8/12/2019 Microeconomics Ch 20.pptx
41/42
(he ow of utiity ma*imiCation e*pains how
consumers decide to aocate their money so
that the ast doar spent on each purchased
product yieds the same amount of e*tra
margina) utiity%
A consumer is in equiibrium when utiity is
Ibaanced per doar) at the margin%J When
this is true! there is no incenti"e to ater the
e*penditure pattern uness tastes! income!
t is margina utiity per doar spent that is equaiCed#
8/12/2019 Microeconomics Ch 20.pptx
42/42
t is margina utiity per doar spent that is equaiCed#
that is! consumers compare the e*tra utiity from
each product with its cost%