Econ 281 Chapter5c - Generally we assume that one consumers...

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1  Generally we assume that one consumer’s demand  does not depend on the demand of others In some cases, a person’s demand has an  EXTERNAL effect on another’s demand – an  externality exists You are less likely to purchase a guard dog if your  neighbour has one You are more likely to eat sushi if all your friends do
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2 If one consumer's demand for a good changes with the  number of other consumers who buy the good, there  are  network externalities . If one person's demand    with the number of other  consumers, then the externality is  positive If one person's demand     with the number of  other consumers, then the externality is  negative . Examples:  Telephone (physical network)                 Software  (virtual network) decreases increases
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3 Apple’s IPod has been growing in popularity and is an  example of a FAD (although one that may last many  years)   or the bandwagon effect. People often buy an IPod because their friends have it -They are purchased to “BE COOL” -They are purchased because more people are  using MP3’s to share music and fewer are using  CD’s or 8 Tracks If IPod prices decrease, an individual’s demand will  increase due to the new price and due to the number of  friends who buy IPods due to the new price
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4 Example:  IPods and The Bandwagon Effect X (units) P X D Original D New Market Demand A B C 20 10 30 38 60 Pure Price Effect Bandwagon Effect Bandwagon Effect (increased quantity demanded when more consumers purchase)
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5 When the first few Hybrid Cars came to Edmonton,  everyone wanted them Even though studies showed they cost more over their 
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