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This chapter focuses on the demand side of markets. Specifically, the Law of Demand and the Rational Spending Rule are developed, market demand curves are built up from individual supply curves, and consumer surplus is linked to the demand curve for a good. | Demand Chapter 5 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Learning Objectives Relate the law of demand to the Cost-Benefit Principle Discuss how individual wants are translated into demand Explain the reasoning behind the rational spending rule and apply it to consumer decision making to show how the rule is related to substitution and income effects Discuss the relationship between the individual demand curve and the market demand curve Define and calculate consumer surplus Free Ice Cream – Or Is It? The cost of a good extends beyond its monetary cost Waiting in line Purchasing a permit Participating in a lottery "Free" ice cream attracts so many consumers that the time spent waiting in line acts as the price of the good Demand curves relate the quantity demanded to ALL costs, not just monetary costs 3 Law of Demand Law of Demand People do less of what they want to do as the cost of doing it rises 4 Cost-Benefit Principle at work Do . | Demand Chapter 5 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Learning Objectives Relate the law of demand to the Cost-Benefit Principle Discuss how individual wants are translated into demand Explain the reasoning behind the rational spending rule and apply it to consumer decision making to show how the rule is related to substitution and income effects Discuss the relationship between the individual demand curve and the market demand curve Define and calculate consumer surplus Free Ice Cream – Or Is It? The cost of a good extends beyond its monetary cost Waiting in line Purchasing a permit Participating in a lottery "Free" ice cream attracts so many consumers that the time spent waiting in line acts as the price of the good Demand curves relate the quantity demanded to ALL costs, not just monetary costs 3 Law of Demand Law of Demand People do less of what they want to do as the cost of doing it rises 4 Cost-Benefit Principle at work Do something if the marginal benefits are at least as great as the marginal costs An increase in the market price approaches our reservation price If market price exceeds the reservation price, buy no more Costs include ALL costs – money, time, reputation Consider implicit and explicit costs Law of Demand 5 Origins of Demand Reservation price Individual tastes and preferences differ Biological needs ■ Cultural influences Peer behavior ■ Individual differences Perceived quality ■ Expected benefits Tastes may change over time Hamburger and donut Pearl milk tea New goods get incorporated into priorities 6 Needs versus Wants Some goods are required for subsistence These are needs Beyond subsistence, behavior is driven by wants Rice or noodle Hamburger or chicken sandwich Wants depend on price Water in Tokyo Regulations or price mechanism Regulations are cumbersome and expensive Price changes are fast and effective 7 California Water Shortages Problem: California has a large population and .
