ECO2003F EDU Workshop 3.pptx

# 200 000 income now current c1 300 000 income in the

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200 000 income now (Current C1) 300 000 income in the future (Future C2) i = 40% Option A implies No consumption in C1, total consumption in C2 is: 200 000 (1+0.4) + 300 000 = 580 000 in future period Option B implies No consumption in C2, total consumption is in period C1: 200 000 + 300 000/(1+0.4) = 414 286 in current period Y = mx + c C2 = -(1+i) + 580 000 C2 = -1.4 + 580 000 Intertemporal consumption bundles C1 C2 580 000 425 000 100 000 414 286 C2 intercept = 200 000 (1+0.4) + 300 000 = 580 000 C1 intercept = 200 000 + 300 000/(1+0.4) = 414286 Slope = 580 000/ 414 286 Slope = - 1.4 Slope = - (1 + i )

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Consider the following scenario. A country has 80 000 inhabitants. 20 000 (group A) have individual demand curves for product X of P X = 1000 – 100 Q X Q X = 10 – 0.01P X Another 30 000 inhabitants (group B) have individual demand curves of P X = 600 – 60 Q X The last 30 000 inhabitants (group C) have individual demand curves of P X = 200 – 20 Q X . 20 000 (group A) have individual demand curves for product X of P X = 1000 – 100 Q X Q X = 10 – 0.01P X If P=500 Q X = 10 – 0.01(500) Q X = 5 20 000 x R5 = Toal Consumption = 100 000
Consider the following scenario. A country has 80 000 inhabitants. 20 000 (group A) have individual demand curves for product X of P X = 1000 – 100 Q X Another 30 000 inhabitants (group B) have individual demand curves of P X = 600 – 60 Q X The last 30 000 inhabitants (group C) have individual demand curves of P X = 200 – 20 Q X . A) The individual demand curve can be rewritten as Q = 10 – 1/100 P. Multiplied by 20 000 Q A = 200 000 -200 P B) Demand curve for an individual in group B can be written as Q = 10 – 1/60 P Multiplied by 30 000 Q B = 300 000 – 500 P. Adding the two demand equations together yields Q market = 500 000 – 700 P. C) The demand for group C is Q C = 300 000 – 1500 P. The market demand for all three groups Q Total = 800 000 – 2200 P

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Until now, we have assumed that a consumers demand is independent of what others are doing, however, a persons demand for a good may be influenced and determined by the number of other people buying the good. If this is the case, we say a network externality exists. This effect can be positive or negative If a typical consumer demands more of a good because more people are buying it, we refer to this as a positive externality. If a typical consumer demands less of a good because more people are buying it, we refer to this as a negative externality.
If a typical consumer demands more of a good because more people are buying it, we refer to this as a positive externality. The Bandwagon effect Adidas Superstars D20 Assume people think only 20 people are buying the good, almost no incentive to purchase (not fashionable). Demand at D20 Price D40 D60 D80 D100 Suppose people think 40 people are buying the good, they find it more attractive, which causes Demand to shift right Demand is now D40. Now, suppose in the same way, people think 60 people are buying the good, Demand is at D60. The more people think people are byuing the good, the the further the demand shifts to the right

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If a typical consumer demands more of a good because more people are buying it, we refer to this as a positive externality. The Bandwagon effect D20 Adidas Superstars 200 Over time consumers get an idea of how many people are actually buying the good (but this is determined by the price) We see that if the price is R200, 40 people buy the good (in this case Demand is D40) In the same way, when the price is R100, 80 people buy the good (and Demand is D80) Price D40 D60 D80 D100 40 80 100
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