Consumer Demand Theory
Ceteris Paribus (cont’d)
1-13-2009

• Individual and Market Demand Curves
• Factors that Shift Demand Curves
• More useful websites

• First Law of Demand
– What Does Law Of Demand
Mean?
– all other factors being equal , as the price of a good or service increases, consumer demand for the good will decrease and vice versa.
– http://www.investopedia.com/term s/l/lawofdemand.asp

• Individual and Market Demand Curves
– Income
– Price of Substitutes
– Price of Compliments
– Product Quality
– Future Prices
– Taste and Preferences
• Market Demand Curves
– Population (market)

Table 4.1

• Market Demand may be kinked as new buyers enter at different price points
When it’s only Tom – Tom’s D is the market
Harry joins the Market
Dick joins

• Sell rule for firms (Q s : P=MC)
– Firms will supply y units up to the point where the MC of producing the next/last unit (y th ) is just equal to the price it receives for the good
– First law of supply: supply curves will be upward sloping
• Buy rule for consumers (Q d : P=MV)
– Consumers will buy x units up to the point that price equals MV for the last (x th ) unit
• First law of demand: demand curves are downward sloping
• Negative slope  diminishing marginal value of consuming next unit

Seattle Times Oct 3, 2007
Olympic National Park officials are suggesting raising the price of an entrance pass for motorists
— good for seven days — from $15 to $25 starting in 2009, with the fee for individuals such as cyclists climbing from $5 to $12. Season passes would increase from $30 to $50
But public response, particularly from tourist-dependent local businesses has been generally negative said a spokeswoman for Olympic National Park.
1.
Illustrate the effect of the increase of the price for park passes on the demand for trips to the park
2.
Illustrate how the park fee increase would affect the demand for other tourist-related businesses, e.g., hotels, restaurants.

Price Indiv 1 Indiv 2 Indiv 3 Indiv 4 Total Rev Total WTP Cons Surp
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
1
2
3
4
5
6
7
8
9
10
0
0
1
1
2
2
3
3
4
4
0
1
2
3
4
5
6
6
6
6
0
1
1
2
2
3
3
4
4
5

– Basics of demand and supply
• http://www.investopedia.com/university/economics/ economics3.asp
Understanding differences between factors that cause shifts in demand or supply
• http://hspm.sph.sc.edu/COURSES/ECON/SD/SD.h
tml
– Cobweb theorem
• http://www.bized.co.uk/current/mind/2004_5/25100
4.ppt