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301lec5

# 301lec5 - Econ 301 Lecture 5 Individual and Market Demand...

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Econ 301 Lecture 5 Individual and Market Demand Professor S. Severinov

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Individual Demand Shows much of a particular good an individual consumer (household) should optimally purchase Depends on consumer preferences, income and prices Is obtained by solving consumer utility maximization problem
Changes of Individual Demand Price Changes Consider the choice between food and clothing studied before For each price change, we can determine how much of the good the individual would purchase given their budget set and preferences (indifference curves)

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Effect of a Price Change Under each price a different amount of food purchased 5 U 3 D 4 U 2 B 12 20 Cconsider:: I = \$20 P C = \$2 P f = \$2, \$1, \$0.50 Food (units per month) Clothing 6 A U 1 4 10 When the price ratio P f /P c falls, MRS also falls E : P f /P c = 2/2 = 1 = MRS G: P f /P c = 1/2 = . 5 = MRS H:P f /P c = .5/2 = .25 = MRS
Consumer Problem At every price point, the consumer is maximizing utility so the condition that the MRS of food for clothing equals the ratio of the prices of food and clothing must hold. The level of utility changes as we move along the demand curve

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Effect of a Price Change By changing prices and solving for the optimal consumption at each price, we can construct a demand curve for the individual From the previous example: Demand Schedule P F F \$2.00 4 \$1.00 12 \$0.50 20
Demand Curve: Effect of a Price Change Demand Curve Individual Demand relates the quantity of a good that a consumer will buy to the price of that good. Food (units per month) Price of Food H E G \$2.00 4 12 20 \$1.00 \$.50

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Consumer Problem At price P F =\$2, the consumer is willing to purchase 4 units of food. This implies the following: the consumer values each of the first units of food that he buys at or above \$2 In fact, he values the fourth unit exactly at \$2 –the maximum that he is willing to pay for the fourth unit is \$2.00
Consumer Problem

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301lec5 - Econ 301 Lecture 5 Individual and Market Demand...

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