L ECTURE T WO : D EMAND IMBA NCCU Managerial Economics Lecturer: Jack Wu.
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Transcript of L ECTURE T WO : D EMAND IMBA NCCU Managerial Economics Lecturer: Jack Wu.
LECTURE TWO: DEMANDIMBA NCCU
Managerial Economics
Lecturer: Jack Wu
INDIVIDUAL DEMAND CURVE, I
Definition: graph of quantity that buyer will purchase at every possible price Construction -- “Other things equal, how many would you buy at a price of ….?’’ vertical axis -- price horizontal axis -- quantity
INDIVIDUAL DEMAND CURVE
Price Quantity ($ per movie) (movies per month) 10.00 0 7.50 1 5.00 2 2.50 4 0.00 7
0
2.50
5
7.50
10
1 4 72
individual demand curve
Quantity (Movies a month)
Pri
ce (
$ p
er
movie
)
INDIVIDUAL DEMAND CURVE
TWO VIEWS
for every possible price, it shows the quantity demanded
for each unit of item, it shows the maximum price that the buyer is willing to pay
DEMAND CURVE: SLOPE
diminishing marginal benefit -- each additional unit of consumption/usage provides less benefit than the preceeding unit
demand curve slopes downward
CONSUMER DIFFERENCES
individual preferences different demand curves changes in consumer's preferences, eg, age different consumers
HOOVER, 1992
A negative price case:
Hoover’s special promotion -- two free air tickets (worth more than £400) for purchase of appliance over £100. promotion attracted over 100,000 customers Hoover incurred £48 million loss
DEMAND AND INCOME
Changes in incomenormal product – demand increases with income
inferior product – demand falls with income
DEMAND AND OTHER FACTORS
prices of related products substitutes complements
advertising
Quantity (Movies a month)
0 1 2 7
2.50
5
7.50
10
demand curve with $1 popcorn
demand curve with $1.50 popcorn
Pri
ce (
$ p
er
movie
)
COMPLEMENT
RECORDED MUSIC
Argentina Canada
CD purchases 0.5 2.6
cassette purchases
0.2 0.4
GDP/capita $9,413 $19,831
CD price $13.80 $11.55
cassette price $ 7.80 $ 6.06
RECORDED MUSIC
Why the average Canadian bought more of both CDs and cassettes?
Why the ratio of CD to cassette purchases was relatively higher in Canada?
RECORDED MUSIC Canadians enjoyed higher incomes Cassettes were a relatively inferior product
compared to CDs Another possible explanation: difference in
the relative prices of CDs and cassettes _ Canada: 11.55/6.06=1.9 _ Argentina: 13.80/7.80=1.77 * don’t not explain why Canadians bought
relatively more CDs than Argentines.
FOOTBALL: TO BROADCAST?
Live broadcasting of away games and attendance at home games are complements
Live broadcasting of home games and attendance at home games are both substitutes and complements
USED CARS
1990 1997/98
avg car age 7.5 yr 8.7 yr
median household income
up 29.9%
avg new car price up 48.4%
USED CARS
Reasons for the increasing demand for used cars:
_ fast rising price of new cars _ increasing quality of used cars _ auto manufacturer reduced frequency of
changing designs _ financial institutions began to offer more
favorable rates.
MARKET DEMAND
Price Joy Max Lucas Market
$10 0 0 0 0
$7.50 1 0 0 1
$5 2 1 0 3
$2.50 4 2 3 9
$0 7 6 4 17
Market demand = horizontal summation of individual demands
MARKET DEMAND
Market demand = horizontal summation of individual demands
Market Demand Factors --own price (move along the demand curve) --other factors (shift the demand curve) _ income level and distribution _ prices of related goods _ population _ demographics _ consumer tastes
BUYER SURPLUS
individual buyer surplus: difference between consumer’s benefit and price she must pay for the item
market buyer surplus: sum of individual buyer surpluses.
0
2.50
5
7.50
10
1 2 4 7
c b e
h
j
g
d a
individual buyer surplus at $2.50 price
individual demand(marginal benefit) curve
Quantity (Movies a month)
Pri
ce (
$ p
er
movie
)
c
f
INDIVIDUAL BUYER SURPLUS
GAINS FROM PRICE CUT
lower price on the quantity that he/she would have purchased at the original price (inframarginal units)
he/she can buy more (marginal units) Case: Student discount price for movie
PACKAGE DEAL
charge buyer just a little less than her/his total benefit
leave buyer with almost zero surplus
TWO-PART TARIFF
fixed payment usage charge
usage charge
fixed payment
BUSINESS DEMAND, I
Business demands items as inputs into further production, not for consumption finished/semi-finished components -- raw materials and energy labor and other services capital
BUSINESS DEMAND, II
Demand for inputs depends on quantity of final output prices of complements and substitutes in
production
BUSINESS DEMAND CURVE
marginal benefit = increase in revenue arising from an additional unit of the input
diminishing marginal benefit downward-sloping demand
AUTOMATED TELLER MACHINES
increase in wages teller service became increasingly costly
banks used ATMs to substitute for tellers
compare use of ATMs in US vs India
GM: WHAT METAL TO USE?
aluminium vis-à-vis steel auto weight
fuel consumption emissions
price
DISCUSSION QUESTION 1 In 1998, the value of worldwide sales of
recorded music in the form of singles, music cassettes, and CDs was $38.7 billion. Americans bought 3.1 CDs and 0.6 music cassette per capita, while Mexicans bought 0.5 CD and 0.3 music cassette per capita.
Explain why per capita CD sales were
relatively higher while per capita sales of music cassettes were relatively lower in the United States than in Mexico.
ANSWER
Music CDs are a normal product, while music cassettes are an inferior product.
DISCUSSION QUESTION 1 CONTINUED
On a suitable diagram, draw the U.S. demand for music CDs. Explain how the following changes would affect the demand curve: (i) increase in the price of CDs; (ii) rise in the ownership of CD players; and (iii) fall in the price of music cassettes.
ANSWER
(i) Increase in the price of music CDs: movement along the demand curve; (ii) rise in CD player ownership: shift demand for CDs to the right; (iii) fall in the price of music cassettes: shift demand for CDs to the left.
DISCUSSION QUESTION 1 CONTINUED
On another diagram, draw the demand for music CDs in Mexico. Explain how the following changes would affect the demand curve: (i) fall in advertising by music publishers such as Sony and Time Warner; (ii) reduction in the penalty for copyright infringement; and (iii) increase in the price of hamburgers.
DISCUSSION QUESTION 2
. Between 2001 and 2003, China Mobile’s number of subscribers grew from 90.6 to 141.6 million as the company added subscribers and acquired service providers in the poorer inland regions of China. However, over the same period, its average revenue per user (APRU) fell from 141 to 102 yuan per month and its proportion of subscribers using pre-paid service rose from 48% to 64%.
DISCUSSION QUESTION 2 CONTINUED
How would the entry of China Unicom affect the demand for China Mobile service?
How would China Mobile’s provision of pre-paid service affect the demand for its post-paid (contract) service?
Compare the demand for pre-paid service in the inland regions with that in the wealthier coastal regions.
Relate your discussion in (b) and (c) to China Mobile’s decline in ARPU.
DISCUSSION QUESTION 3
The price of Chanel perfume is around $200 per fluid ounce, while the price of Arrowhead bottled water is $1 per gallon. Nancy buys 2 fluid ounces of Chanel and 10 gallons of bottled water a month.
DISCUSSION QUESTION 3 CONTINUED
Using relevant demand curves, illustrate Nancy's choices. Illustrate how the following changes will affect Nancy's demand for Chanel perfume: (i) price increase to $220 per fluid ounce, and (ii) cut in price of another of Nancy's favorite perfumes.
Nancy spends more money each month on perfume than bottled water. Does this necessarily mean that perfume gives her more total benefit than water? Use appropriate demand curves to address this question.