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# Derivation of - PowerPoint PPT Presentation

Derivation of. The Demand Curve. Preview of 4 Coming Attractions. Today: Derivation of the Demand Curve Consumers ( Buyers ) Next: Derivation of the Supply Curve Firms ( Sellers ) Later: Double Auction Market Buyers and and sellers come together

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Presentation Transcript

The Demand Curve

• Today: Derivation of the Demand Curve

• Next: Derivation of the Supply Curve

• Firms (Sellers)

• Later: Double Auction Market

• Buyers and and sellers come together

• Still later: Competitive Equilibrium Model

• Helps explain why a competitive market works well.

• Helps determine the position of the demand curve and the sensitivity of quantity demanded to price.

• Elasticity is a measure of how sensitive one variable (e.g. quantity demanded) is to another variable (e.g. price).

• Definition: the price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price e= (% Q)/(%P)

• maybe you, maybe me, but could be anyone

• Derive demand curve for that individual

• focus on marginal utility or marginal benefit

• Add up demand curves for many such individuals to get market demand curve

People

make purposeful choices

with limited resources

When applied to the behavior of consumers

People

maximize utility

subject to a budget constraint

• Marginal Utility

• Diminishing Marginal Utility

Ratio of marginal utilities equals ratio of prices for any two goods

(MUG/MUB) = (PG/PB)

First pointed out by Adam Smith

The consumer chooses an amount such that the marginal benefit (MB) equals price (P)

When I see a demand curve, I think of the marginal benefit to consumers

WGAD: Why do economists put the quantity on the horizontal axis?

Willingness to pay is usually greater than the price

for example my willingness to pay for a pair of eyeglasses is much more than the price

Consumer surplus is the area under the demand curve and above the price

Consider all consumers in the market

Add up quantity demanded by all individuals at each price to get market demand