Individual and Market DemandChapter OutlineFrom Individual to Market DemandSlide 4Slide 5Willingness to Pay (WTP)Slide 7Slide 8Slide 9Consumer SurplusSlide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Individual and Market DemandChapter 4Chapter OutlineIndividual DemandIncome and Substitution EffectsMarket DemandConsumer Surplus●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) (2) (3) (4) (5)Price Individual A Individual B Individual C Market($) (Units) (Units) (Units) (Units)1 6 10 16 322 4 8 13 253 2 6 10 184 0 4 7 115 0 2 4 6From Individual to Market DemandAt 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 DemandWe 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 individualsTwo 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.From Individual to Market DemandWillingness 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 the good.name WTPAnthony $250Chad 175Flea 300John 125Example: 4 buyers’ WTP for an iPodWillingness to Pay (WTP)Derive the demand schedule:4John, Chad, Anthony, Flea 0 – 1253Chad, Anthony, Flea126 – 1752Anthony, Flea176 – 2501Flea251 – 3000nobody$301 & upQdwho buysP (price of iPod)name WTPAnthony $250Chad 175Flea 300John 125Willingness to Pay (WTP)P Qd$301 & up 0251 – 300 1176 – 250 2126 – 175 3 0 – 125 4PQ1 2 3 4350300250200150100 50 0Willingness to Pay (WTP)PQ1 2 3 4350300250200150100 50 0At 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.Flea’s WTPAnthony’s WTPChad’s WTPJohn’s WTPConsumer SurplusConsumer surplus is the amount a buyer is willing to pay minus the amount the buyer actually pays:CS = WTP – PPQ1 2 3 4350300250200150100 50 0Consumer Surplus and the Demand CurveP = $260 Flea’s CS = $300 – 260 = $40Total CS = $40Flea’s WTPPQ1 2 3 4350300250200150100 50 0Consumer Surplus and the Demand CurveFlea’s WTPInstead, suppose P = $220 Flea’s CS = $300 – 220 = $80Anthony’s CS =$250 – 220 = $30Total CS = $110Anthony’s WTPPQ5 10 15 20 60 50 40 30 20 10 0Consumer Surplus and the Demand CurveAt Q = 5(thousand), the marginal buyer is willing to pay $50 for pair of shoes. Suppose P = $30. Then his consumer surplus = $20. The demand for shoesPQ5 10 15 20 60 50 40 30 20 10 0Consumer Surplus and the Demand CurveThe demand for shoesCS is the area b/w P and the D curve, from 0 to Q. Recall: area of a triangle equals ½ x base x heightHeight =$60 – 30 = $30. So, CS = ½ x 15 x $30 = $225.hPQ5 10 15 20 60 50 40 30 20 10 0Consumer Surplus and the Demand CurveThe demand for shoesIf P rises to $40, CS = ½ x 10 x $20 = $100.Two reasons for the fall in CS.1. Fall in CS due to buyers leaving market2. Fall in CS due to remaining buyers paying higher P●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.Network Externalities●snob effect Negative network externality in which a consumer wishes to own an exclusive or unique