Individual and Market Demand Chapter 4 Chapter Outline Individual Demand Income and Substitution Effects Market Demand Consumer Surplus From Individual to Market Demand market demand curve Curve relating the quantity of a good that all consumers in a market will buy to its price Determining the Market Demand Curve 1 Price 2 Individual A Units 3 Individual B Units 4 Individual C Units 5 Market Units 1 6 10 16 32 2 4 8 13 25 3 2 6 10 18 4 0 4 7 11 5 0 2 4 6 From Individual to Market Demand At a price of 4 the quantity demanded by the market 11 units is the sum of the quantity demanded by A no units B 4 units and C 7 units From Individual to Market Demand Two points should be noted as a result of this analysis 1 The market demand curve will shift to the right as more consumers enter the market 2 Factors that influence the demands of many consumers will also affect market demand We might obtain information about the demand for home computers by adding independently obtained information about the demands of the following groups Households with children Households without children Single individuals Willingness to Pay WTP A buyer s willingness to pay for a good is the maximum amount the buyer will pay for that good WTP measures how much the buyer values Example name WTP the good 4 buyers WTP Anthony 250 for an iPod Chad 175 Flea 300 John 125 Willingness to Pay WTP Derive the demand schedule name WTP Anthony 250 Chad 175 Flea 300 John 125 P price of iPod 301 up 251 300 176 250 126 175 who buys Qd nobody 0 Flea 1 Anthony Flea 2 Chad Anthony Flea 3 John Chad 0 125 Anthony Flea 4 Willingness to Pay WTP P 350 300 250 200 150 100 50 P Qd 301 up 0 251 300 1 176 250 2 126 175 3 0 125 4 0 1 2 3 4 Q Willingness to Pay WTP P Flea s WTP 350 Anthony s WTP Chad s WTP John s WTP 300 250 200 150 100 50 0 1 2 3 4 Q At any Q the height of the D curve is the WTP of the marginal buyer the buyer who would leave the market if P were any higher Consumer Surplus Consumer surplus is the amount a buyer is willing to pay minus the amount the buyer actually pays CS WTP P Consumer Surplus and the Demand Curve P 260 P Flea s CS 300 260 40 Flea s WTP 350 300 250 200 Total CS 40 150 100 50 0 1 2 3 4 Q Consumer Surplus and the Demand Curve P Instead suppose P 220 Flea s WTP 350 Anthony s WTP 300 250 Flea s CS 300 220 80 200 150 100 50 0 1 2 3 4 Q Anthony s CS 250 220 30 Total CS Consumer Surplus and the Demand Curve The demand for shoes P 60 50 40 30 20 10 0 5 10 15 20 Q At Q 5 thousand the marginal buyer is willing to pay 50 for pair of shoes Suppose P 30 Then his consumer surplus 20 Consumer Surplus and the Demand Curve The demand for shoes P 60 50 h 40 30 20 10 0 5 10 15 20 Q CS is the area b w P and the D curve from 0 to Q Recall area of a triangle equals x base x height Height 60 30 30 So CS x 15 x 30 225 Consumer Surplus and the Demand Curve If P rises to 40 CS x 10 x 20 100 Two reasons for the fall in CS 2 Fall in CS due to remaining buyers paying higher P The demand for shoes P 60 50 40 1 Fall in CS due to buyers leaving market 30 20 10 0 5 10 15 20 Q Network Externalities network externality Situation in which each individual s demand depends on the purchases of other individuals A positive network externality exists if the quantity of a good demanded by a typical consumer increases in response to the growth in purchases of other consumers If the quantity demanded decreases there is a negative network externality Network Externalities bandwagon effect Positive network externality in which a consumer wishes to possess a good in part because others do snob effect Negative network externality in which a consumer wishes to own an exclusive or unique good