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UMass Amherst ECON 103 - Class 10 Aggregate demand curves Fall 2014

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Slide 1Slide 2Slide 3Slide 4What happens to the amount purchased when prices rise?Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28No longer in or outSlide 30Is taste a matter of individual preference?Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38It can be hard to go against fadsSlide 40Slide 41Slide 42Slide 43MuesliHetero and FonduShadowAggregate Demand Curvesand Shifting DemandPunchline: Aggregate demand curves are not the same as the sum of individual curves.What happens to the amount purchased when prices rise?Orthodox theory says amount falls to equate price with marginal utility. Alternative theory says that this is true only for isolated individuals. In a group, the aggregate demand may rise with higher prices.Big ideas•Individuals buy less with higher prices to find Q where individual MU = new, higher, price.•In social context, MU is influenced by others.•At higher prices, MU may rise with pleasure of impressing others (Veblen effects) or because higher prices signal higher quality (Price signals). •MU may increase with pleasure of joining others (stampedes and fads) or convenience of fitting in (network economies).•Changes in preferences, income, price of complements or substitutes change amount bought at any price by moving demand curve.Orthodox approach assumes perfect information and asocial behavior•We judge based on how others behave.–If they are buying it at a high price, it must be good.–If it is cheap, it must be bad.•We buy to impress–If it is expensive, our neighbors will notice–If it is cheap, they will also notice•We buy to fit in, or to distinguish ourselves–We dress like our friends, but different–We consume to network with them, or to be specialHow do we react when prices rise?Orthodox: MU and downward sloping demand curves:We buy less until our MU equals the new, higher priceReal World: Social demandSometimes we buy more when others want something; higher prices signal statusIt depends on whether we consume as individuals or as part of a groupDo you shop for yourself?Then why do some many of us dress alike?Men dress like men; women like women.If dresses fell in price would men wear them?Why we care what other people do?Social sources of utility from consumption•Status: Showing off. Veblen effects.•Bonding: Being one with your group. Stampedes.•If others buy it, that means it is a good product. Price signals.•If others buy it, I will fit in if I have it also. Network effects.What was she thinking?Did she think that an expensive dress like this must be beautiful?Or was she showing off that she has money to waste?“Veblen Effects” after Thorstein Veblen (1857-1929)Veblen was different.He had many affairs, with married women, and with his (female) students.In The Theory of the Leisure Class (1899), he said that we buy to impress, “conspicuous consumption”.Veblen argues that we consume to impress othersWe buy things to signal to others that we are successful.(Adam Smith would have agreed.)Does this explain why some people wear such uncomfortable clothes?Higher prices can give our consumption statusI rate because I have money to spend.Or whatever.Sometimes we buy what others buy to join the crowd. Status is in doing what others do, but a little better.Does this explain why men don’t wear dresses, but women do?Some things help us to fit in:Sometimes we follow the crowd because we think they know betterPrices tell us how others rate a product. Sometimes we value their judgment.How else do we know if we are buying a BMW, or a lemon?How do we know what we are buying?A study using brain imaging found people like wine better if they believe it is expensive.Higher prices validate our choicesIt was hard to drink wine in thisTrue or false: If something is expensive, it is better.True or false: If something becomes more expensive, you buy less.If everyone else starts to buy something, how do we react?Do we stop buying it because the price has gone up?Or do we buy more because we are now part of a larger network of people who consume the same thing?Do you want to be the only one with a metric ruler?How would you react if prices rise?•Buy less because of marginal utility?•Buy more to show off that we can?•Buy more because the higher price signals that this is a good and desired product?•Buy more because this signals that others are buying it and we want to fit in?Why does anyone use Microsoft?Sometimes we want what others have because it is convenient to be part of a networkIt can be easier to communicate with those who consume like us.It is easier to get spare parts. And help.Maybe not enoughMaybe aggregate demand curves look like this?Higher prices go with higher demand because prices signal quality and status.Even if there is diminishing MU.Moving demand curves•Demand curves move when the amount purchased at any price changes.•Change in demand may reflect changes in preferences, in income, or in the price of substitutes or the price of complements.•Demand may change because of social circumstances: social infrastructure, or the strength of networks, and fads.When demand curves move outMore will be purchased at any price; or consumers will pay more for the same amount.PQWhen demand curves move inLess will be purchased at any price; or consumers will pay Less for the same amount.PQExamples of moving demand curvesChanging preferences: Stuff that people don’t want anymoreVHS tape players: Prices have fallen but people still won’t buy. You can get one for free at the town landfill. Stuff that people now really want.Hybrid cars: Despite rising prices people are buying more.What moves demand curves, I: PreferencesPeople (younger sisters?) suddenly don’t like Britney; they like Hannah Montana instead.OUT!IN!The most in?No longer in or outCan you explain taste?Is taste a matter of individual preference?Why do the French drink wine? Why do Germans drink beer?Why do the French speak French? Why does anyone speak Basque?Why do men wear ties in the summer? Why do women wear dresses in winter?Why do women wear pantyhose?What moves demand curves, 2:Changes in incomeChina and India are getting rich enough to buy oil, increasing world demandWhat moves demand curves, 3:Changes in the price of substitutes and complementsA “complement” is consumed with something.


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