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Unformatted text preview: Chapter 4: Individual and Market Demand CHAPTER 4 INDIVIDUAL AND MARKET DEMAND TEACHING NOTES Chapter 4 relies on two important ideas from Chapter 3: the influence of price and income changes on the budget line, and how to determine the optimal consumer choice. The chapter focuses on deriving individual demand graphically by changing either price or income, determining the income and substitution effects of a price change, deriving market demand, demand elasticity, and consumer surplus. These concepts are crucial to understanding the application of demand and supply analysis in Chapter 9 as well as the discussion of market failure in Parts III and IV. The analytical tools students learn in this chapter will be important for the discussion of factor supply and demand in Chapter 14. When discussing the derivation of demand, review how the budget curve pivots around an intercept as price changes and how optimal quantities change as the budget line pivots. Once students understand the effect of price changes on consumer choice, they can grasp the derivation of the price consumption path and the individual demand curve. Remind students that the price a consumer is willing to pay is a measure of the marginal benefit of consuming another unit. Income and substitution effects are often difficult for the student to understand, and they frequently have trouble remembering which effect is which on the graph. Emphasize that the substitution effect explains the portion of the change in demand caused by the change in relative prices (a pivot of the budget line) and the income effect explains the portion of the change in demand caused by a change in purchasing power (a shift of the budget line). The distinction between normal and inferior goods is used to determine the direction of the income effect. You might point out that the demand curve can only slope upwards if the good is inferior and the income effect is unusually large (a Giffen good). Doing a lot of examples is helpful. You might even skip the topic altogether if you are not prepared to devote some time to it. The labor leisure choice problem and derivation of the labor supply curve is a good illustration of income and substitution effects (see Chapter 14). When covering the aggregation of individual demand curves, stress that this is equivalent to the summation of the individual demand curves horizontally. To obtain the market demand curve, you must have demand written in the form Q=f(P) as opposed to the inverse demand P=f(Q). The concept of a kink in the market demand curve is often new to students. Emphasize that this is because not all of a kink in the market demand curve is often new to students....
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This note was uploaded on 06/06/2011 for the course ECON 302 taught by Professor Avrin-rad during the Spring '09 term at University of Illinois, Urbana Champaign.
- Spring '09