demand review econs 451: lecture # 6 understand the definition of demand. explain the difference...
Post on 22-Dec-2015
217 views
TRANSCRIPT
![Page 1: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/1.jpg)
Demand ReviewEconS 451: Lecture # 6
• Understand the definition of Demand.
• Explain the difference between Marshallian and Hicksian Demand.
• Be able to describe and explain the substitution and income effect in product space from a change in price.
• Understand how proportion of expenditure allocated to a specific good impacts the substitution and income effect.
• Understand the difference between demand shifts and structural change.
• Calculate Own-Price, Income and Cross-Price Elasticity of Demand.
![Page 2: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/2.jpg)
Why review demand relationships?
• Helps us understand market behavior!
• Explains price fluctuations!
• Provides a foundation for empirical research and analysis!
• Equips you with necessary analytical capability to evaluate market dynamics!
![Page 3: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/3.jpg)
Demand Review
• Demand Defined:
• The various quantities of a particular commodity that an individual consumer is willing and able to buy as the price varies, all other factors held constant.
![Page 4: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/4.jpg)
Demand Review
• Begins at the individual level……then summed across all individuals to the market level.
Individual Attempting to Solve
Max U(x1 , x2) s.t. p1x1 + p2 x2 = I
![Page 5: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/5.jpg)
Demand Review
• Marshallian Demand
Max U(x1 , x2) s.t. p1x1 + p2 x2 = I
• Hicksian (or Compensated) Demand
Min Expenditures E(p, U) s.t. U(x1 , x2) = UF
![Page 6: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/6.jpg)
Individual Demand
Quantity X
Price
25
Demand
5
45
10
![Page 7: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/7.jpg)
Product Space
v wu
X
Y
25 100
U 1
U 2
100
r s
t
37 5045
![Page 8: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/8.jpg)
Observations
• If the commodity in questions represents a large proportion of expenditures, then the income effect from a change in the price will be relatively large.
• Both Income and Substitution effect usually inversely related to price changes.
![Page 9: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/9.jpg)
Static and Dynamic Demand
• Static :• Quantity movements or responses to price while all
other factors are assumed constant.
• Movements along a demand curve.
• Dynamic:• Shifts and changes in demand that happen with the
passage of time to account for changes in income, population, taste and preferences, etc.
• Structural Change• Change in the shape of the demand curve due to
changes in technology or information.
![Page 10: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/10.jpg)
Graphical Changes in Demand
Quantity
Parallel Shift
Shift and Structural Change
Price
![Page 11: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/11.jpg)
Demand Changes
• Shift
• Parallel shifts from changes such as income, population.
• Structural Change
• Changes in the parameters or functional form.
YPQ
2YPQ
![Page 12: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/12.jpg)
Short Run……….Long Run
• Short Run :
• Time period too short for complete quantity adjustment from a price change (a snapshot).
• Long Run:
• The time required for a complete quantity adjustment to occur in response to a “once-and-for-all” price change.
![Page 13: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/13.jpg)
Distributed Lag Models
• Refers to a delayed adjustment in quantity as a result of a price change.
• And the adjustment may be spread over a period of time.
),,( 1 tttdt PPYfQ
![Page 14: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/14.jpg)
Speculative Demand
• Consumer demand for current consumption
• Speculative demand• Anticipated demand and uses
• Future cost > current cost + all storage costs
• Commodity market financial investment• “open interest”
• Current market price impacted by current and expected events.
![Page 15: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/15.jpg)
Primary and Derived Demand
Quantity
Derived Demand
Primary Demand
Pr
Pd
Price
![Page 16: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/16.jpg)
Own-Price Elasticity of Demand
• Relates changes in the price of the commodity back to the changes in quantity demanded.
• Defined at a point along the demand curve.
• At the average• Arc formula
• Assuming Q = f(P)
Q
P
Pd
QdEp
![Page 17: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/17.jpg)
Own-Price Elasticity of Demand
Range
• Elastic
• Unitary Elasticity
• Inelastic
• Revenue and elasticity • TR = P(Q)
1pE
1pE
1pE
![Page 18: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/18.jpg)
Income Elasticity of Demand
• Relates changes in income back to the changes in quantity demanded.
• Defined at a point along the demand curve.
Q
Y
Yd
QdEY
![Page 19: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/19.jpg)
Income Elasticity of Demand
Range
• Inferior
• Normal0YE
0YE
![Page 20: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/20.jpg)
Cross-Price Elasticity of Demand
• Relates changes in the price of the jth product back to the changes in the quantity demanded for the ith product.
• Defined at a point along the demand curve.
i
j
j
iij Q
P
P
QE
![Page 21: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/21.jpg)
Cross-Price Elasticity of Demand
Range
• Independent
• Substitute
• Complement
• Generalizations because of the “income and substitution effects” of a price change of inferior goods.
0ijE
0ijE
0ijE
![Page 22: Demand Review EconS 451: Lecture # 6 Understand the definition of Demand. Explain the difference between Marshallian and Hicksian Demand. Be able to describe](https://reader035.vdocument.in/reader035/viewer/2022062516/56649d7d5503460f94a5f9e5/html5/thumbnails/22.jpg)
Summary Questions
• Explain the difference between individual and market demand.
• Describe the difference between the short and long run as it relates to market demand.
• What is meant by a distributed-lag……as it relates to demand?
• Explain what the own-price, income, and cross-price elasticity of demand are each measuring.