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[[Economics|Economics Lectures]] - <nowiki>[</nowiki>[[Economics_Lecture_One|1]] - [[Economics_Lecture_Two|2]] - [[Economics_Lecture_Three|3]] - [[Economics_Lecture_Four|4]] - [[Economics_Lecture_Five|5]] - [[Economics_Lecture_Six|6]] - [[Economics_Lecture_Seven|7]] - [[Economics_Lecture_Eight|8]]<nowiki>]</nowiki>

[[Economics|Economics Lectures]] - <nowiki>[</nowiki>[[Economics_Lecture_One|1]] - [[Economics_Lecture_Two|2]] - [[Economics_Lecture_Three|3]] - [[Economics_Lecture_Four|4]] - [[Economics_Lecture_Five|5]] - [[Economics_Lecture_Six|6]] - [[Economics_Lecture_Seven|7]] - [[Economics_Lecture_Eight|8]]<nowiki>]</nowiki>

<br>Fourth Lecture – Theory of Demand

Fourth Lecture – Theory of Demand

<br>I. Introduction

==Introduction==

In this course we have covered the supply and demand curves, and examined the economic concept of “elasticity”.  Now we turn to focus solely on “demand”.

In this course we have covered the supply and demand curves, and examined the economic concept of “elasticity”.  Now we turn to focus solely on “demand”.

By comparing a change in price of a good to the change in the CPI, you can tell whether the real price of the good is becoming more or less expensive.  If the good’s price increases by less than the CPI’s increase, then the good has a real price that is falling.

By comparing a change in price of a good to the change in the CPI, you can tell whether the real price of the good is becoming more or less expensive.  If the good’s price increases by less than the CPI’s increase, then the good has a real price that is falling.

<br>II. Income and Substitution Effects

==Income and Substitution Effects==

When the real price of a good decreases, there are two main economic effects.  First, it increases the real income of consumers because they do not have to spend as much on the good.  For example, if you drink a gallon of milk each week and the price of that gallon decreases by 25 cents, then you have 25 cents extra to spend on something else.  It is as though your income went up by 25 cents.  This is called the “income effect.”

When the real price of a good decreases, there are two main economic effects.  First, it increases the real income of consumers because they do not have to spend as much on the good.  For example, if you drink a gallon of milk each week and the price of that gallon decreases by 25 cents, then you have 25 cents extra to spend on something else.  It is as though your income went up by 25 cents.  This is called the “income effect.”

Except for the rare and possibly non-existent Giffen good, the “Law of Demand” is this: when the price of a good increases, its demand decreases.  When the price of a good decreases, its demand increases.  This is one of the most fundamental rules of Economics.

Except for the rare and possibly non-existent Giffen good, the “Law of Demand” is this: when the price of a good increases, its demand decreases.  When the price of a good decreases, its demand increases.  This is one of the most fundamental rules of Economics.

<br>III. Utility

==Utility==

Money isn’t everything.  We have many expressions for this concept.  “There’s more to life than money.”  “It’s only money.”  “What’s your job satisfaction?” The basic point is that dollars and cents do not capture our overall happiness or satisfaction as a consumer.  You may buy the most expensive music CD on the market, or watch the most popular movie, or buy the fanciest clothes, but that does not mean you will like those items the best.  Often our favorite goods are not the most expensive ones.

Money isn’t everything.  We have many expressions for this concept.  “There’s more to life than money.”  “It’s only money.”  “What’s your job satisfaction?” The basic point is that dollars and cents do not capture our overall happiness or satisfaction as a consumer.  You may buy the most expensive music CD on the market, or watch the most popular movie, or buy the fanciest clothes, but that does not mean you will like those items the best.  Often our favorite goods are not the most expensive ones.

It is impossible for anyone else to measure your utility, or for you to try to compare your total utility to that of other consumers.  What you can do is decide for yourself which goods and prices give you the greatest utility, and then buy accordingly.  That may include political and religious views in addition to pure dollars and cents.  For example, some conservatives boycott companies that fund abortion, regardless of how inexpensively those companies sell their goods.  Such a boycott maximizes the participants’ utility, but not their savings.  Many other boycotts have occurred in American history based on principles rather than price (“principle, not principal!”).

It is impossible for anyone else to measure your utility, or for you to try to compare your total utility to that of other consumers.  What you can do is decide for yourself which goods and prices give you the greatest utility, and then buy accordingly.  That may include political and religious views in addition to pure dollars and cents.  For example, some conservatives boycott companies that fund abortion, regardless of how inexpensively those companies sell their goods.  Such a boycott maximizes the participants’ utility, but not their savings.  Many other boycotts have occurred in American history based on principles rather than price (“principle, not principal!”).

<br>IV. Indifference Curve

==Indifference Curve==

In graphing your utility for two goods, you can construct what is known as an “indifference curve.”  Let’s take an example.  Suppose you are working on the homework for this course with three friends - Chris, Stephanie and Kevin.  Someone says they are hungry and go to look for snacks.  You see a half-eaten bag of potato chips and you pop a bag of popcorn.  However, there is not enough food for everyone, so have to ration who receives what.

In graphing your utility for two goods, you can construct what is known as an “indifference curve.”  Let’s take an example.  Suppose you are working on the homework for this course with three friends - Chris, Stephanie and Kevin.  Someone says they are hungry and go to look for snacks.  You see a half-eaten bag of potato chips and you pop a bag of popcorn.  However, there is not enough food for everyone, so have to ration who receives what.

Was this worth it?  You bet: now you have two extra potato chips that you would not have had by splitting everything equally.  Chris and Stephanie are just as happy, and you can share the additional chips with Kevin.

Was this worth it?  You bet: now you have two extra potato chips that you would not have had by splitting everything equally.  Chris and Stephanie are just as happy, and you can share the additional chips with Kevin.

<br>V. Consumer Choice

==Consumer Choice==

“Consumer surplus” is the net benefit (in dollars) a consumer obtains from buying a good.  Thus (consumer surplus) = (total benefit) - (total cost)

“Consumer surplus” is the net benefit (in dollars) a consumer obtains from buying a good.  Thus (consumer surplus) = (total benefit) - (total cost)

Consumers stop buying a good when the demand price equals the price paid.  For movies, the demand price falls the longer it keeps playing in a theater.  After you’ve seen the movie once or twice, you’re not willing to pay so much to see it again.  People stop paying to see the movie, and the theater stops playing it and begins showing a new movie instead.

Consumers stop buying a good when the demand price equals the price paid.  For movies, the demand price falls the longer it keeps playing in a theater.  After you’ve seen the movie once or twice, you’re not willing to pay so much to see it again.  People stop paying to see the movie, and the theater stops playing it and begins showing a new movie instead.

<br>VI. Assignment  

==Assignment==

Read and, if necessary, reread the above lecture.  Complete the homework assignments through the level in which you choose to enroll in this course:

Read and, if necessary, reread the above lecture.  Complete the homework assignments through the level in which you choose to enroll in this course:

Introductory:  1. The total utility of a good represents the consumer’s _________________.

===Introductory===

 

1. The total utility of a good represents the consumer’s _________________.

2. Conservatives say a bad effect of raising the minimum wage is that it causes more students to drop out of school.  Why would that happen?  

2. Conservatives say a bad effect of raising the minimum wage is that it causes more students to drop out of school.  Why would that happen?  

Intermediary:

===Intermediary===

3.  A student likes swimming and playing the violin.  The first hour she swims she improves by 6 units of utility, and then each successive hour she improves by half the rate of the hour before it.  The first hour she practices the violin she improves by 4 units of utility, then each successive hour she improves at a rate of 90% the hour before it.  In 3 total hours to practice, how should she maximize her utility?

3.  A student likes swimming and playing the violin.  The first hour she swims she improves by 6 units of utility, and then each successive hour she improves by half the rate of the hour before it.  The first hour she practices the violin she improves by 4 units of utility, then each successive hour she improves at a rate of 90% the hour before it.  In 3 total hours to practice, how should she maximize her utility?

6. Bad British economic policies and a fungus wiped out the basic food supply of potatoes in Ireland between 1846 and 1849, killing 500,000 and sending many Irish to the United States.  Do you think potatoes might have been an “inferior” good then?  What would you expect the income effect of the shortage of potatoes to have been?  

6. Bad British economic policies and a fungus wiped out the basic food supply of potatoes in Ireland between 1846 and 1849, killing 500,000 and sending many Irish to the United States.  Do you think potatoes might have been an “inferior” good then?  What would you expect the income effect of the shortage of potatoes to have been?  

Honors: 

===Honors===

7. Do you think a Giffen good really exists?  Can you see any possible political bias in the claim that Giffen goods exist?  Your views, please.

7. Do you think a Giffen good really exists?  Can you see any possible political bias in the claim that Giffen goods exist?  Your views, please.