MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 1
Lecture 13 (2005.10.27)
Class today
Chapter 5
P117-128
MB MC
Demand,The Benefit
Side of The Market
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 3
Overview
Chapter 5 presents the material in a way that
illustrates the core principle of the textbook,that
marginal benefits should equal marginal costs,
The chapter presents the demand curve as derived
from marginal benefits,Chapter 6 presents the
supply curve as derived from marginal costs,
These two chapters provide the details behind the
principle that MC = MB and give students a solid
basis for understanding and applying it in a variety
of situations.
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 4
Overview
Chapter 5 develops the idea of utility
maximization and the model of consumer choice
behind the demand curve,It presents the Rational
Spending Rule and explains how changes in the
price of substitutes and income affect demand.
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 5
The Law of Demand
People do less of what they want to do
as the cost of doing it rises
D
P
Q
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 6
The Law of Demand
The benefit of an activity equals the
highest price we’d be willing to pay to
pursue it (i.e.,the reservation price).
(The price of a good includes monetary and non-
monetary costs )
As the cost of an activity rises and
exceeds the reservation price,less of
the activity will be pursued,
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 7
The Law of Demand
The Origins of Demand
What determines,tastes” or,preferences”?
taste___the type of thing that you tend to like
preference___the thing that you like best in a
group of things
Biology
Culture
Peer Influences
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 8
The Law of Demand
Economic Naturalist
Needs vs,Wants
Why does California
experience chronic
water shortages?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 9
Translating Wants into Demand
Measuring Wants,The Concept of Utility and
Marginal utility
Utility (U)
The satisfaction people derive from their
consumption activities
Marginal utility (MU)
The additional utility gained from consuming an
additional unit (monetary unit or time unit)of a good
cost/benefit criterion
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 10
Translating Wants into Demand
How should we allocate our incomes
among the various goods and services
that are available?
Utility and Utility Maximization
Jeremy Bentham and the "utilometer"
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 11
Translating Wants into Demand
Assumption
People allocate their income to maximize their
satisfaction or total utility
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 12
Sarah’s Total Utility from Ice Cream Consumption
Cone quantity (cones/hour) Total utility (utils/hour)
0 0
1 50
2 90
3 120
4 140
5 150
6 140
How much ice cream should Sarah
consume if the ice cream is,free”?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 13
Sarah’s Total Utility from Ice Cream Consumption
Cones/hour
Uti
ls/
ho
ur
1 3 4 5 60 2
150
140
120
90
50
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 14
Translating Wants Into Demand
What should Sarah do when she gets
to the front of the line?
What do you think?
Is the time spent in the
line relevant to how
many cones to order?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 15
Sarah’s Total Utility and Marginal Utility from Ice
Cream Consumption
Cone quantity Total utility Marginal utility
(cones/hour) (utils/hour) (utils/cone)
0 0
1 50
2 90
3 120
4 140
5 150
6 140
50
40
30
20
10
-10
__
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 16
Sarah’s
marginal
utility
Diminishing Marginal Utility
Cones/hour
Uti
ls/
co
ne
1 3 4.50 1.50.5 43.52.52
50
40
30
20
10
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 17
Translating Wants into Demand
The Law of Diminishing Marginal Utility
The tendency for the additional utility
gained from consuming an additional unit
of a good to diminish as consumption
increases beyond some point
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 18
Translating Wants into Demand
Allocating A Fixed Income Between
Two Goods
Assume
Two goods,Chocolate and vanilla ice cream
Price of chocolate equals $2/pint
Price of vanilla equals $1/pint
Sarah’s budget = $400/yr
Currently Sarah is consuming 200 pints of
vanilla and 100 pints of chocolate
Example 5.1
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 19
Translating Wants into Demand
Question
Is Sarah maximizing her
total utility?
Allocating Fixed Income to Maximize Utility
optimal combinations of goods
a,affordable
b,maximize utility
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 20
Marginal Utility Curves for
Two Flavors of Ice Cream (I)
Pints/yr
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
Ma
rg
ina
l u
tili
ty
of
ch
oc
ola
te
ice
cr
ea
m
(u
tils
/ p
int)
Pints/yr
12
200
16
100
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 21
Translating Wants into Demand
Marginal utility vanilla/P
$12/1 = 12 utils/$
Marginal utility chocolate/P
16/2 = 8 utils/$
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 22
Translating Wants into Demand
If Sarah spends $2 less on chocolate,
utils will decline by 16.
If Sarah spends $2 more on vanilla,utils
will increase by 24
So…
Sarah should buy more vanilla
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 23
Marginal Utility Curves for Two Flavors of Ice Cream (II)
Pints/yr
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
12
200
8
300
Sarah increases vanilla
spending by $100,and
MUV/PV = 8/$1 = 8
Example 5.2
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 24
Marginal Utility Curves for Two Flavors of Ice Cream (II)
Ma
rg
ina
l u
tili
ty
of
ch
oc
ola
te
ic
e c
re
am
(u
tils
/ p
int)
Pints/yr
16
100
24
50
Sarah decreases chocolate
spending by $100,and
MUC/PC = 24/$2 = 12 >
MUV/pV = 8
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 25
Marginal Utility Curves for Two Flavors of Ice Cream
(III)
Pints/yr
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
10
250
1
10
V a n i l laP r ice
V a n i l la?MU
Example 5.3
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 26
Marginal Utility Curves for Two Flavors of Ice Cream
(III)
Ma
rg
ina
l u
tili
ty
of
ch
oc
ola
te
ic
e c
re
am
(u
tils
/ p
int)
Pints/yr
20
75
2
20
Ch o c o l a t e P r i c e
Ch o c o l a t e?MU
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 27
Translating Wants into Demand
The Rational Spending Rule
Spending should be allocated across
goods so that the marginal utility per dollar
is the same for each good.
V
V
C
C
P
MU
P
MU
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 28
Translating Wants into Demand
The Rational Spending Rule
How is the rational spending rule related to
the cost-benefit principle?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 29
Homework
Review questions
1; 2 ; 3; 4
Problems
2; 3; 4; 6
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 30
Lecture 14 (2005.11.1)
Recap p117-128
P129-139
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 31
Recap and exercises
Review questions
1; 2 ; 3; 4
Problems
2; 3; 4; 6
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 32
Translating Wants into Demand
Income and Substitution Effects
Revisited
Example 5.4
How should Sarah respond to a reduction
in the price of chocolate ice cream?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 33
Marginal Utility Curves for Two Flavors of Ice Cream
(III)
Pints/yr
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
Ma
rg
ina
l u
tili
ty
of
ch
oc
ola
te
ic
e c
re
am
(u
tils
/ p
int)
Pints/yr
10
250
20
75
1
10
V a n illaP r ice
V a n illa?MU 220 Ch o c o la t e P r ic e Ch o c o la t e?MU
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 34
Translating Wants into Demand
Assume
Budget = $400
PC = $2 & PV = $1
QC = 75 & QV = 250
1
10
P
MU
2
20
P
MU
V
V
C
C
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 35
Translating Wants into Demand
Assume
Price of chocolate falls to $1
1
10
P
MU
1
20
P
MU
V
V
C
C
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 36
Applying the Rational Spending Rule
Economic Naturalist
Why do the wealthy in
Manhattan live in
smaller houses than the
wealthy in Seattle?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 37
Applying the Rational Spending Rule
Economic Naturalist
Why did people turn to
four-cylinder cars in the
1970s only to shift back
to six- and eight-
cylinder cars in the
1990s?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 38
Applying the Rational Spending Rule
Economic Naturalist
Why are automobile
engines smaller in
England than in the
United States?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 39
Applying the Rational Spending Rule
The Importance of
Income Differences
Why are waiting lines
longer in poorer
neighborhoods?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 40
Individual and Market Demand Curves for Canned Tuna
Pr
ice
($
/ca
n)
Smith’s quantity
12
6
14
16
10
8
6
4
2
0
(cans/week)
2 4 8
Pr
ice
($
/ca
n)
Jones’s quantity
6
3
8
4
2
0
(cans/week)
1 2 4
Smith Jones+
Horizontal Addition
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 41
Individual and Market Demand Curves for Canned Tuna
Pr
ice
($
/ca
n)
Total quantity
12
6
14
16
10
8
6
4
2
0
(cans/week)
2 4 8 1210
=
Market
Demand
curve
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 42
The Individual and Market Demand Curves
When All Buyers Have Identical Demand Curves
Pr
ice
($
/ca
n)
Total quantity
6
6
5
4
3
2
1
0
(cans/month)
2 4 8 1210
D
Total quantity
6
6
5
4
3
2
1
0
(1000s of cans/month)
2 4 8 1210
D
Pr
ice
($
/ca
n)
Each of 1,000 consumers have the same demand
Market Demand = P x number of consumers (1,000)
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 43
Demand and Consumer Surplus
Consumer Surplus
The difference between a buyer’s
reservation price for a product and the
price actually paid
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 44
Demand
A Market with a,Digital” Demand Curve
Units/day
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
1
1
2
3
4
5
6
7
8
9
10
11
12
2 3 4 5 6 7 8 9 10 11 120
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 45
Consumer Surplus
Units/day
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
1
1
2
3
4
5
6
7
8
9
10
11
12
2 3 4 5 6 7 8 9 10 11 12
Demand
0
Consumer surplus
= $15/day
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 46
Supply and Demand in the Market for Milk
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
1
.50
1.00
1.50
2.00
2.50
3.00
2 3 4 5 6 7 8 9 10 11 120
S
D
Example 5.6 How much do buyers benefit from
their participation in the market for milk?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 47
Consumer Surplus in the Market for Milk
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
1
.50
1.00
1.50
2.00
2.50
3.00
2 3 4 5 6 7 8 9 10 11 120
S
D
Consumer surplus?h = $1/gallon
b = 4,000
Consumer surplus =
(1/2)(4,000)(1) =
$2,000/day
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 48
Homework
Review chapter 5
Problems 8;9
Preview chapter 6
MB MC
End of
Chapter
Chapter 5,Demand,The Benefit Side of the Market Slide 1
Lecture 13 (2005.10.27)
Class today
Chapter 5
P117-128
MB MC
Demand,The Benefit
Side of The Market
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 3
Overview
Chapter 5 presents the material in a way that
illustrates the core principle of the textbook,that
marginal benefits should equal marginal costs,
The chapter presents the demand curve as derived
from marginal benefits,Chapter 6 presents the
supply curve as derived from marginal costs,
These two chapters provide the details behind the
principle that MC = MB and give students a solid
basis for understanding and applying it in a variety
of situations.
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 4
Overview
Chapter 5 develops the idea of utility
maximization and the model of consumer choice
behind the demand curve,It presents the Rational
Spending Rule and explains how changes in the
price of substitutes and income affect demand.
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 5
The Law of Demand
People do less of what they want to do
as the cost of doing it rises
D
P
Q
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 6
The Law of Demand
The benefit of an activity equals the
highest price we’d be willing to pay to
pursue it (i.e.,the reservation price).
(The price of a good includes monetary and non-
monetary costs )
As the cost of an activity rises and
exceeds the reservation price,less of
the activity will be pursued,
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 7
The Law of Demand
The Origins of Demand
What determines,tastes” or,preferences”?
taste___the type of thing that you tend to like
preference___the thing that you like best in a
group of things
Biology
Culture
Peer Influences
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 8
The Law of Demand
Economic Naturalist
Needs vs,Wants
Why does California
experience chronic
water shortages?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 9
Translating Wants into Demand
Measuring Wants,The Concept of Utility and
Marginal utility
Utility (U)
The satisfaction people derive from their
consumption activities
Marginal utility (MU)
The additional utility gained from consuming an
additional unit (monetary unit or time unit)of a good
cost/benefit criterion
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 10
Translating Wants into Demand
How should we allocate our incomes
among the various goods and services
that are available?
Utility and Utility Maximization
Jeremy Bentham and the "utilometer"
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 11
Translating Wants into Demand
Assumption
People allocate their income to maximize their
satisfaction or total utility
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 12
Sarah’s Total Utility from Ice Cream Consumption
Cone quantity (cones/hour) Total utility (utils/hour)
0 0
1 50
2 90
3 120
4 140
5 150
6 140
How much ice cream should Sarah
consume if the ice cream is,free”?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 13
Sarah’s Total Utility from Ice Cream Consumption
Cones/hour
Uti
ls/
ho
ur
1 3 4 5 60 2
150
140
120
90
50
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 14
Translating Wants Into Demand
What should Sarah do when she gets
to the front of the line?
What do you think?
Is the time spent in the
line relevant to how
many cones to order?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 15
Sarah’s Total Utility and Marginal Utility from Ice
Cream Consumption
Cone quantity Total utility Marginal utility
(cones/hour) (utils/hour) (utils/cone)
0 0
1 50
2 90
3 120
4 140
5 150
6 140
50
40
30
20
10
-10
__
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 16
Sarah’s
marginal
utility
Diminishing Marginal Utility
Cones/hour
Uti
ls/
co
ne
1 3 4.50 1.50.5 43.52.52
50
40
30
20
10
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 17
Translating Wants into Demand
The Law of Diminishing Marginal Utility
The tendency for the additional utility
gained from consuming an additional unit
of a good to diminish as consumption
increases beyond some point
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 18
Translating Wants into Demand
Allocating A Fixed Income Between
Two Goods
Assume
Two goods,Chocolate and vanilla ice cream
Price of chocolate equals $2/pint
Price of vanilla equals $1/pint
Sarah’s budget = $400/yr
Currently Sarah is consuming 200 pints of
vanilla and 100 pints of chocolate
Example 5.1
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 19
Translating Wants into Demand
Question
Is Sarah maximizing her
total utility?
Allocating Fixed Income to Maximize Utility
optimal combinations of goods
a,affordable
b,maximize utility
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 20
Marginal Utility Curves for
Two Flavors of Ice Cream (I)
Pints/yr
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
Ma
rg
ina
l u
tili
ty
of
ch
oc
ola
te
ice
cr
ea
m
(u
tils
/ p
int)
Pints/yr
12
200
16
100
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 21
Translating Wants into Demand
Marginal utility vanilla/P
$12/1 = 12 utils/$
Marginal utility chocolate/P
16/2 = 8 utils/$
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 22
Translating Wants into Demand
If Sarah spends $2 less on chocolate,
utils will decline by 16.
If Sarah spends $2 more on vanilla,utils
will increase by 24
So…
Sarah should buy more vanilla
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 23
Marginal Utility Curves for Two Flavors of Ice Cream (II)
Pints/yr
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
12
200
8
300
Sarah increases vanilla
spending by $100,and
MUV/PV = 8/$1 = 8
Example 5.2
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 24
Marginal Utility Curves for Two Flavors of Ice Cream (II)
Ma
rg
ina
l u
tili
ty
of
ch
oc
ola
te
ic
e c
re
am
(u
tils
/ p
int)
Pints/yr
16
100
24
50
Sarah decreases chocolate
spending by $100,and
MUC/PC = 24/$2 = 12 >
MUV/pV = 8
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 25
Marginal Utility Curves for Two Flavors of Ice Cream
(III)
Pints/yr
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
10
250
1
10
V a n i l laP r ice
V a n i l la?MU
Example 5.3
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 26
Marginal Utility Curves for Two Flavors of Ice Cream
(III)
Ma
rg
ina
l u
tili
ty
of
ch
oc
ola
te
ic
e c
re
am
(u
tils
/ p
int)
Pints/yr
20
75
2
20
Ch o c o l a t e P r i c e
Ch o c o l a t e?MU
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 27
Translating Wants into Demand
The Rational Spending Rule
Spending should be allocated across
goods so that the marginal utility per dollar
is the same for each good.
V
V
C
C
P
MU
P
MU
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 28
Translating Wants into Demand
The Rational Spending Rule
How is the rational spending rule related to
the cost-benefit principle?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 29
Homework
Review questions
1; 2 ; 3; 4
Problems
2; 3; 4; 6
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 30
Lecture 14 (2005.11.1)
Recap p117-128
P129-139
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 31
Recap and exercises
Review questions
1; 2 ; 3; 4
Problems
2; 3; 4; 6
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 32
Translating Wants into Demand
Income and Substitution Effects
Revisited
Example 5.4
How should Sarah respond to a reduction
in the price of chocolate ice cream?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 33
Marginal Utility Curves for Two Flavors of Ice Cream
(III)
Pints/yr
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
Ma
rg
ina
l u
tili
ty
of
ch
oc
ola
te
ic
e c
re
am
(u
tils
/ p
int)
Pints/yr
10
250
20
75
1
10
V a n illaP r ice
V a n illa?MU 220 Ch o c o la t e P r ic e Ch o c o la t e?MU
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 34
Translating Wants into Demand
Assume
Budget = $400
PC = $2 & PV = $1
QC = 75 & QV = 250
1
10
P
MU
2
20
P
MU
V
V
C
C
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 35
Translating Wants into Demand
Assume
Price of chocolate falls to $1
1
10
P
MU
1
20
P
MU
V
V
C
C
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 36
Applying the Rational Spending Rule
Economic Naturalist
Why do the wealthy in
Manhattan live in
smaller houses than the
wealthy in Seattle?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 37
Applying the Rational Spending Rule
Economic Naturalist
Why did people turn to
four-cylinder cars in the
1970s only to shift back
to six- and eight-
cylinder cars in the
1990s?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 38
Applying the Rational Spending Rule
Economic Naturalist
Why are automobile
engines smaller in
England than in the
United States?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 39
Applying the Rational Spending Rule
The Importance of
Income Differences
Why are waiting lines
longer in poorer
neighborhoods?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 40
Individual and Market Demand Curves for Canned Tuna
Pr
ice
($
/ca
n)
Smith’s quantity
12
6
14
16
10
8
6
4
2
0
(cans/week)
2 4 8
Pr
ice
($
/ca
n)
Jones’s quantity
6
3
8
4
2
0
(cans/week)
1 2 4
Smith Jones+
Horizontal Addition
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 41
Individual and Market Demand Curves for Canned Tuna
Pr
ice
($
/ca
n)
Total quantity
12
6
14
16
10
8
6
4
2
0
(cans/week)
2 4 8 1210
=
Market
Demand
curve
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 42
The Individual and Market Demand Curves
When All Buyers Have Identical Demand Curves
Pr
ice
($
/ca
n)
Total quantity
6
6
5
4
3
2
1
0
(cans/month)
2 4 8 1210
D
Total quantity
6
6
5
4
3
2
1
0
(1000s of cans/month)
2 4 8 1210
D
Pr
ice
($
/ca
n)
Each of 1,000 consumers have the same demand
Market Demand = P x number of consumers (1,000)
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 43
Demand and Consumer Surplus
Consumer Surplus
The difference between a buyer’s
reservation price for a product and the
price actually paid
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 44
Demand
A Market with a,Digital” Demand Curve
Units/day
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
1
1
2
3
4
5
6
7
8
9
10
11
12
2 3 4 5 6 7 8 9 10 11 120
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 45
Consumer Surplus
Units/day
Ma
rg
ina
l u
tili
ty
of
va
nil
la
ice
cr
ea
m
(u
tils
/ p
int)
1
1
2
3
4
5
6
7
8
9
10
11
12
2 3 4 5 6 7 8 9 10 11 12
Demand
0
Consumer surplus
= $15/day
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 46
Supply and Demand in the Market for Milk
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
1
.50
1.00
1.50
2.00
2.50
3.00
2 3 4 5 6 7 8 9 10 11 120
S
D
Example 5.6 How much do buyers benefit from
their participation in the market for milk?
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 47
Consumer Surplus in the Market for Milk
Quantity (1,000s of gallons/day)
Pr
ice
($
/g
all
on
)
1
.50
1.00
1.50
2.00
2.50
3.00
2 3 4 5 6 7 8 9 10 11 120
S
D
Consumer surplus?h = $1/gallon
b = 4,000
Consumer surplus =
(1/2)(4,000)(1) =
$2,000/day
MB MC
Chapter 5,Demand,The Benefit Side of the Market Slide 48
Homework
Review chapter 5
Problems 8;9
Preview chapter 6
MB MC
End of
Chapter
