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UNC-Chapel Hill ECON 410 - Applications of Market Demand

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Slide 1Econ 410: Micro TheoryApplications of Market DemandWednesday, September 19th, 2007Slide 2Problem Set Q&A Reminders Due Friday Chapter 3 Problems: Questions for Review, #6, #12, Exercises, #5, #7, #10, #15 Chapter 4 Problems (Appendix):#2, #4, #5 Problems from Chapter 4 will be worth 2 points each, while problems from Chapter 3 will be worth 1 point each. Hints Ordinal vs. Cardinal Utility Showing demand functions are equivalentSlide 3Consumer Surplus The difference between the amount that a consumer is willing to pay for a good and its market price is known as consumer surplus. Consumer surplus measures the ability of a market to make people better off Calculating Consumer Surplus If we know the market demand for a good, consumer surplus can be easily calculated.Slide 4A Classroom Experiment… How much would you be willing to pay for an “A” in this class? Answer honestly – all responses will be kept anonymous Take your individual budget constraints into account Using this information, we can create a market demand curve for an “A”  If we know the market demand and the market-clearing price, we can calculate consumer surplusSlide 5A Classroom Experiment… What does the classroom demand for an “A” look like? Suppose Lauren is willing to set the price of an “A” at $50.  How would we find the total consumer surplus in this market? How much would Lauren receive from the class in total? How would we illustrate this graphically?Slide 6Applying Consumer Surplus The measurement of consumer surplus has important implications for economics and public policy When examining a policy, economists can use cost-benefit analysis to determine the total benefits and costs to society Consumer surplus can be used as one measure of these benefits Connections to Welfare EconomicsSlide 7Network Externalities So far, we have always assumed that the demand for a good is internal to an individual The consumption of a good by one person does not affect the demand of a different consumer However, there are certain cases in which the demand of one individual can depend on the demand of others These goods are said to have networkexternalities associated with themSlide 8Network Externalities A positive network externality implies that quantity demanded will increase in response to purchases by other consumers. Example – Text Messaging A negative network externality implies that quantity demanded will decrease in response to purchases by other consumers. Example - DiamondsSlide 9 This positive network externality occurs when there is a desire to be in style, to have a good because almost everyone else has it, or to indulge in a fad Example – Tickle-Me Elmo The initial demand for cigarettes, drugs, and alcohol could be a bandwagon effect C'mon, everyone else is doing it….The Bandwagon EffectSlide 10The “Snob” Effect This negative network externality occurs when there is a desire be unique, or own goods that not many other people have. Example – Hand-made goods The quantity demanded of a “snob” good is higher the fewer people who own it. What are some other examples of network externalities?Slide 11Demand in the “Real World” Estimating actual demand curves happens frequently in the real world Companies may estimate demand for their product or the product of a competitor in order to determine a profit-maximizing price Governments might estimate the demand for a good to find out the benefits and costs of a particular policy Example – Food Stamps How do people actually do this?Slide 12Demand in the “Real World” Statistically Estimating Demand When attempting to estimate the demand for a good, it is crucial to understand the product market. How mistakes are made Suppose university officials wish to estimate the demand for season tickets for UNC basketball tickets. Also suppose, for simplicity, that this is a free market with no free student ticketsSlide 13Demand in the “Real World” The officials observe the quantities demanded at various prices and estimate the following function: Qd= a-b(Price of Tickets)Quantity (in thousands)Price0 5 10 15 20 25$60$40$20$100$80D1Slide 14Demand in the “Real World”DGD1D2 But, suppose the available data is from three separate years, each which had a different number of Duke games? What might demand actually look like?D3Quantity (in thousands)Price0 5 10 15 20 25$60$40$20$100$80For this reason, demandestimation is a skill thatrequires a great deal of careand knowledge about whatis being studied.Slide 15For next time… Read in your textbook: Pages 136-138 Sections 5.1 and 5.2 Problem Set Make sure you label all graphs clearly and show your work. Announcements Recall from your syllabus that there will be no class on Friday, September 28th. However, there will be a quiz next Wednesday on the topics covered in class in Chapter


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UNC-Chapel Hill ECON 410 - Applications of Market Demand

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