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Quantity
Individual demand: reservation price
model
• Consider a good, like an iPod, or a refrigerator, or
a textbook, such that most demanders buy one
unit or none at all.(A second unit isn’t of much
use.)
• A demander’s “reservation price” or “Buyer
Value” is the highest price that he would be
willing to pay to have the good rather than not
have it.
• Answers to our iPod and iPhone questions are
Buyer Values.
Individual Demand Curve with
reservation price $200
Price
$200
1 Quantity
A Market demand Curve
Buyer Value Number of
Demanders
$100 10
$200 15
$300 10
Price
$300
$200
$100
10 25 35 Quantity
If price is $10, how many units will
be demanded?
Buyer Value # Demanders
$20 11
$40 21
A) 0 units
B) 11 units
C) 21 units
D) 32 units
If price is $30, how many units will
be demanded?
Buyer Value # Demanders
$20 11
$40 21
A) 0 units
B) 11 units
C) 21 units
D) 32 units
Many consumers, many steps
• The market demand curve in our example had
only 3 different Buyer Values and hence was
like a stairway with 3 steps.
• If there are many demanders with different
Buyer Values, steps become small, demand
curve is well approximated by a continuous
curve.
Linear demand curve
• A useful example: Linear demand curve.
• p=a-bq for some a and b.
Price
• Total expenditures on a
Good are price x quantity.
Note that pq=(a-bq)q=aq-bq2
Quantity
Individuals may consume more
than one unit.
• Typical case: Diminishing marginal willingness
to pay for an additional unit.
• Keep buying so long as one more unit is worth
more than the price.
• This implies that you will buy more units if
price is lower.
Individual demand for gasoline
• The higher the price of gasoline, the less
gasoline per month someone will buy.
Price per
gallon
Gallons
Per month
Market demand
• For any price, market demand is sum of
quantities demanded by individuals.
Person 1 Person 2
Demand Curve Demand Market demand
Curve Curve
Price
Consumers’ Surplus
• Difference between what you pay for a good
and the most you would be willing to pay
rather than go without the good.
• Example: You are willing to pay $350 for an
IPOD nano. They cost $199.
• What is your consumers’ surplus?
Consumers’ surplus for consumer
who demands multiple goods.
• Area under demand curve, above the price.
Consumer’s
Surplus
Readings
• Prepare for Experiment 1 by reading
description of this experiment in Bergstrom
Miller text.
• Show up at your section. You must go to your
own section.
• Read McAfee, Chapter 2, Section 2.1.1.
(If you don’t know calculus, skip the calculus
discussion on pp 2-11-2-14.)
OK, We’re out of here