ECON 2020 - PRINCIPLES OF

MICROECONOMICS
DR. CARMEN ASTORNE

DEMAND
-

Demand: basic definitions.

Demand Curves.
Types of goods.
Individual Demand and Market
Demand.
- Consumer Surplus
- Demand Elasticities.

ASSUMPTION:
COMPETITIVE MARKETS
If all sellers and buyers face the same price,
we call it the market price.
Remember that in a Perfectly Competitive market

1. Sellers sell an identical good

or service.
2. No individual buyer or seller is
powerful enough to affect the
market price

All agents are PRICE TAKERS

INDIVIDUAL DEMAND
Studies the behavior of individual buyers
Where does it come from?
Subjective elements:

what they like/want

individual preferences
Objetive elements:

consumption possibilities

given: budget constraints

QUANTITY
DEMANDED:

CETERIS
PARIBUS:

The amount of a good that buyers are

willing and able to buy.
Latin for with other things the same
all other stuff (other
than price) that affects
quantity demanded

INDIVIDUAL DEMAND
DEMAND
CURVE:

Plots the quantity demanded of a good at

each price, holding all else equal.

quantity
demanded
of good x

price of
good x

Qdx ( Px ; Py , I , )
(-)

LAW OF
DEMAND:

other
determinants

Holding all else equal, the quantity

demanded rises when the price falls.

INDIVIDUAL DEMAND: EXAMPLE

DEMAND
SCHEDULE

INDIVIDUAL DEMAND
P

P=5
P=4
D
Qd=3 Qd=4

Qd

+1
WILLINGNESS The highest price that a buyer is willing to pay
TO PAY:
for an extra unit of the good.

INDIVIDUAL DEMAND
The DEMAND CURVE shows:
The maximum quantitiy of a

good that buyer is willing to buy

at a given price
Qd = (P)

e.g.: Qd = (21/2) (3/2)P

P

P=5
D
Qd=3

The highest per unit price that

the buyer is willing to pay for a

given quantity of the good
P = -1(Qd)
(inverse demand)

Qd

solve for P: P=7 (2/3)Qd

P
P=3

D
Qd=6

Qd

INDIVIDUAL DEMAND
quantity
demanded
of good x

price of
good x

Qdx ( Px ; Py , I , )
(-)

other
determinants

(?)
Income and wealth

OTHER
DETERMINANTS

Availability and prices of other goods

Tastes and preferences
Beliefs about the future
Etc.

TYPES OF GOODS
1. Relationship to prices of other goods
Substitutes
(+)

Megabus
Greyhound
car

degrees of
substitutibility

plane

Complementary

(-)

cars & tires

software & hardware
coffee & cream

degrees of
complementarity

2. Relationship to income
(+) Normal goods
(-) Inferior goods
Not related

noodles
ramen noodles
dentist visits

Preferences
vary across
different people

INDIVIDUAL DEMAND AND

MARKET DEMAND CURVES
Market demand is the sum of the individual demand
curves of all the potential buyers.

D=
P

P=4
P=3

DB

DA+ DB if P<4

DB

DA

Qd=2 Qd=6

Qd

Qd=8

EXAMPLE: 2 consumers, Ann and Bob

ANNS
DEMAND
FOR COFFEE

if P>4

BOBS
DEMAND
FOR COFFEE

MARKET
DEMAND FOR
COFFEE

Qd

MARKET DEMAND
quantity
demanded
of good x

price of
good x

Qdx ( Px ; Py , I , )
other
determinants
Income and wealth

OTHER
DETERMINANTS

Availability and prices of other goods

Tastes and preferences
Beliefs about the future
Number and scale of buyers

DEMAND CURVE
What happens if...
... price changes, ceteris paribus?

MOVEMENT
ALONG THE
DEMAND CURVE

P
P

Qd

DEMAND
SHIFTS

P=6

P=4
D

Qd

... another determinant

changes?

Qd=4 Qd=8

Qd

P=3

Qd=6

D
Qd
Qd=10

CONSUMER SURPLUS

CONSUMER
SURPLUS
(INDIVIDUAL)

Difference between an individuals willingness to

pay and the price paid for the good.

CONSUMER SURPLUS

CONSUMER
SURPLUS
(MARKET)

Monetary measure of
consumer welfare

D
Qd

Qd