Demand Curves

1. Demand Curves

2. Do you own an iPod? • Yes • No

3. Clicker Test Press the Letter A on your clicker.

4. What is the most you would be willing to pay for an iPod Nano? (if you didn’t have an iPod and couldn’t get one for less) • Less than $100 • $101-$150 • $151-$200 • $201-$250 • $251-$300 • $301-$350 • $351-$400 • $401-$500 • $501-$600 • More than $600

5. Do you own an iPhone? • Yes • No

6. What is the most you would be willing to pay for an iPhone? (if you couldn’t get one for less) • Less than $100 • $101-$200 • $201-$300 • $301-$400 • $401-$500 • $501-$600 • $601-$700 • $701-$800 • $801-$1000 • More than $1000

7. Price and Quantity • Apple recently announced that it had sold a total of 1 million iPhones. • Price was $599 when introduced in July, 2007. • In September, 2007 Apple cut the price to $399. • How will this affect Apple sales?

8. Demand function • The demand function for a good reports the number of units that demanders will want to buy as a function of the price of the good. • Individual demand function: Number of units one person will buy as function of price. • Market demand: Total number of units bought as a function of price.

9. Drawing demand curve • Economics tradition: Put quantity on horizontal axis, price on vertical axis. • Typically demand curve slopes down: Higher price means lower quantity demanded. Price Quantity

10. Individual demand: reservation price model • Consider a good, like an iPod, or a refrigerator, or a textbook, such that most demanders buy one unit or none at all.(A second unit isn’t of much use.) • A demander’s “reservation price” or “Buyer Value” is the highest price that he would be willing to pay to have the good rather than not have it. • Answers to our iPod and iPhone questions are Buyer Values.

11. Individual Demand Curve with reservation price $200 Price $200 1 Quantity

12. A Market demand Curve Price $300 $200 $100 10 25 35 Quantity

13. If price is $10, how many units will be demanded? A) 0 units B) 11 units C) 21 units D) 32 units

14. If price is $30, how many units will be demanded? A) 0 units B) 11 units C) 21 units D) 32 units

15. Many consumers, many steps • The market demand curve in our example had only 3 different Buyer Values and hence was like a stairway with 3 steps. • If there are many demanders with different Buyer Values, steps become small, demand curve is well approximated by a continuous curve.

16. Linear demand curve • A useful example: Linear demand curve. • p=a-bq for some a and b. • Total expenditures on a Good are price x quantity. Note that pq=(a-bq)q=aq-bq2 Price Quantity

17. Individuals may consume more than one unit. • Typical case: Diminishing marginal willingness to pay for an additional unit. • Keep buying so long as one more unit is worth more than the price. • This implies that you will buy more units if price is lower.

18. Individual demand for gasoline • The higher the price of gasoline, the less gasoline per month someone will buy. Price per gallon Gallons Per month

19. Market demand • For any price, market demand is sum of quantities demanded by individuals. Person 1 Demand Curve Person 2 Demand Curve Market demand Curve Price

20. Consumers’ Surplus • Difference between what you pay for a good and the most you would be willing to pay rather than go without the good. • Example: You are willing to pay $350 for an IPOD nano. They cost $199. • What is your consumers’ surplus?

21. Consumers’ surplus for consumer who demands multiple goods. • Area under demand curve, above the price. Consumer’s Surplus

22. Readings • Prepare for Experiment 1 by reading description of this experiment in Bergstrom Miller text. • Show up at your section. You must go to your own section. • Read McAfee, Chapter 2, Section 2.1.1. (If you don’t know calculus, skip the calculus discussion on pp 2-11-2-14.)

23. OK, We’re out of here