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Chapter 4 Consumer Equilibrium and Market Demand Fall 2012
Chapter 4 Consumer Equilibrium and Market Demand Fall 2012
Equilibrium
and Market
Demand
Chapter 4
Chapter 4
Topics of Discussion
• Conditions for Consumer Equilibrium
• Changes in Equilibrium
Changes in product price
Changes in other demand determinants
• The Law of Demand
• Tastes and Preferences
Composition of the population
Attitudes toward nutrition or health
– food safety
– lifestyles
–technological forces
–advertising
• Consumer Surplus
Theory of Consumer Economic
Behavior
1. Indifference Curve
Consumer Preferences
2. Budget Line
Affordability
Consumer Equilibrium
Leads to Demand Curve for the Product
Consumer Equilibrium
MUH T PH
MRS
MUT H PT
Measurement and
Interpretation of
Consumer Equilibrium
Consumer Equilibrium
Must find the point where utility is
maximized subject to the budget constraint.
This situation occurs where:
MUHAMBURGERS MUTACOS
=
PHAMBURGERS PTACOS
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Consumer Equilibrium
Must find the point where utility is
maximized subject to the budget constraint.
This situation occurs where:
MUHAMBURGERS MUTACOS
=
PHAMBURGERS PTACOS
Utility is maximized by
buying 5 tacos @ $0.50
and 2 hamburgers @ $1.25
given a budget constraint
of $5.00 per week….
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Consumer Equilibrium
Points B and D
exceed the budget
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Consumer Equilibrium
Point C does
not maximize
utility…
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Effects of Changes in Price of the Product
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Effects of Changes in Price of the Product
A price decrease of
hamburger prices to
$1.00 would cause
Carl to increase his
weekly purchases
of hamburgers from
2 to 3.
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Effects of Changes in Price of the Product
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Effects of Changes in Price of the Product
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Demand Schedule for Hamburgers
$7.00
D
Price of hamburgers
$6.00
C
$5.00
$4.00
$3.00
$2.00 A B
$1.00
$0.00
0 1 2 3
Quantity of hamburgers
Three “Laws” in
Economics So Far
Original
equilibrium
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Effects of Changes in Available Income
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Effects of Changes in Available Income
Original
equilibrium
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Engel curve for hamburgers Engel curve for tacos
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Movement from
point A to B is
called a change
in the quantity
demanded…
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Concept of Consumer Surplus
An important extension of the market demand curve
is the concept of consumer surplus, or economic well
being consumers derive in the market.
The demand curve reveals the willingness of consumers
to pay a certain price for a corresponding quantity.
Concept of Consumer Surplus
An important extension of the market demand curve
is the concept of consumer surplus, or economic well
being consumers derive in the market.
The demand curve reveals the willingness of consumers
to pay a certain price for a corresponding quantity.
They are willing to pay a higher price for a lesser
quantity, but do not have to given the level of supply
coming onto the market in a given period. Thus, they
realize a “savings”.
Concept of Consumer Surplus
An important extension of the market demand curve
is the concept of consumer surplus, or economic well
being consumers derive in the market.
The demand curve reveals the willingness of consumers
to pay a certain price for a corresponding quantity.
They are willing to pay a higher price for a lesser
quantity, but do not have to given the level of supply
coming onto the market in a given period. Thus, they
realize a “savings”.
We will use this concept later in Chapter 8 when we
discuss market equilibrium.
Area ABC is the consumer
surplus if price is $6. The
demand curve implies they
were willing to pay $10 for
the 1st unit, $9 for the second
unit, etc. But they only had
to pay $6 each for all 5 units!
F G
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Area DACE is the
gain in consumer
surplus if the price
falls to $5 F G
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