Scribd
Upload
21 views

Chapter-4: Individual and Market Demand: Managerial Economics (Bus-525) Course Convener: Dr. Tamgid Ahmed Chowdhury

This document provides an outline of topics covered in a chapter on individual and market demand. It will discuss deriving individual demand curves using the indifference curve approach, the price, income, and substitution effects for normal, inferior, and Giffen goods. It will also cover how to construct a market demand curve from individual demand schedules and analyze consumer and producer surplus. Graphs and diagrams are provided as examples to illustrate these concepts, such as how substitution and income effects differ for normal versus inferior goods, and how to compare policies like cash transfers versus price subsidies or food stamps. The last part discusses using diagrams to show the impact of a gas tax along with a rebate, and defines key terms like consumer surplus, producer surplus, and

Uploaded by

Zayed Mohammad Johny
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
21 views

Chapter-4: Individual and Market Demand: Managerial Economics (Bus-525) Course Convener: Dr. Tamgid Ahmed Chowdhury

This document provides an outline of topics covered in a chapter on individual and market demand. It will discuss deriving individual demand curves using the indifference curve approach, the price, income, and substitution effects for normal, inferior, and Giffen goods. It will also cover how to construct a market demand curve from individual demand schedules and analyze consumer and producer surplus. Graphs and diagrams are provided as examples to illustrate these concepts, such as how substitution and income effects differ for normal versus inferior goods, and how to compare policies like cash transfers versus price subsidies or food stamps. The last part discusses using diagrams to show the impact of a gas tax along with a rebate, and defines key terms like consumer surplus, producer surplus, and

Uploaded by

Zayed Mohammad Johny
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 18

CHAPTER-4: INDIVIDUAL

AND MARKET DEMAND


MANAGERIAL ECONOMICS (BUS-525)
COURSE CONVENER:
DR. TAMGID AHMED CHOWDHURY

CHAPTER OUTLINE

Economics for Managers

We will learn about:


Individual demand and derivation of demand
curve by using IC approach
Price effect, income effect and substitution effect
for normal, inferior and giffen goods
Impact of tax on socially desirable consequences
Market demand curve from individual demand
schedule
Consumer and producer surplus analysis

PRICE CHANGE AND


INDIVIDUAL DEMAND CURVE

Effect of price change:


When price of one
product decreases,
that will rotate the
budget line, hence the
demand curve of the
product can be drawn.
Price consumption
curve: curve tracking
the utility
maximizing
combinations.

Economics for Managers

INCOME CHANGE AND


CONSUMERS RESPONSE

Economics for Managers

If income increases
with price constant,
the consumers will
demand more of a
normal product

INCOME CHANGE AND


CONSUMERS RESPONSE:
INFERIOR GOODS

Economics for Managers

Consumers prefer
less of inferior
goods when income
increases. Thus
income
consumption curve
becomes backward

ENGEL CURVE
Curve relating the
quantity of a good
consumed to income.
In (a), food is a
normal good and the
Engel curve is
upward sloping. In
(b), however,
rotten rice is
inferior good after
a certain income
level.

Economics for Managers

INCOME AND SUBSTITUTION


EFFECT
When price of a product declines, it has two
important effects
1) People can get that product at a cheaper price
thus the ability or purchasing power rises
2) People may not increase the consumption of the
product to maximum thus there is an income
gain.

Economics for Managers

PRICE, INCOME AND SUBSTITUTION


EFFECT: NORMAL GOODS

Economics for Managers

Substitution effect: It
shows the change in
consumption of a
product (whose price has
changed) while keeping
the utility constant. For
example, even if the
consumer can consume
F1F2 extra, they will
actually consume F2E.
Thus EF2 is income
gain.

INCOME AND SUBSTITUTION


EFFECT FROM INFERIOR GOODS

Economics for Managers

For inferior
goods, income
effect is always
negative as
can be seen in
the diagram.

TRY YOURSELF: THE CASE OF


GIFFEN GOOD
For giffen goods, price effect is positive which
means traditional demand rule is not applicable.

Economics for Managers

10

Cash vs. a Price Subsidy: Lessons


A cash transfer and an equal-cost price subsidy have the
same income effect, but the price subsidy also has a
price effect.
It follows that
the cash transfer leads to higher utility, and
the price subsidy leads to more consumption of the
subsidized good.

A Price Subsidy and an Equal-Cost Cash Grant


Budget Line with
Cash Grant
Tangency Point
with Cash Grant

Clothing

Tangency Point
with Price Subsidy

I3
I2
I1
F1 F3
Cost of Both Programs
(in Units of Food)

F2

Food

Budget Line with


Price Subsidy

Food Stamps

Are poor people better off receiving


food stamps or a comparable amount
of cash?

Food Stamps Versus Cash


All other goods
per month

Budget line with cash

Y + 100

f
C

I3

I2

I1
B
A

Original
budget line
100

Budget line with


food stamps

Y + 100
Food per month

COMPARE DISCOUNT CARD AND GIFT CARD


INCOME
Economics for Managers

C
A

IC3
IC2

BL1
0

Q1

Q3 Q2

IC1

BL3

BL2
Good X
15

COMPARE DISCOUNT CARD, GIFT CARD AND


CASH GIFT
INCOME
D
Economics for Managers

IC4
IC3
C
A

IC2

IC1
BL1
0

Q1

Q3 Q2

BL3

BL2
Good X
16

TAX ON GASOLINE FOR SOCIAL


CAUSE

Economics for Managers

Tax on gasoline has been imposed to reduce


pollution in the society. But after that
government has given some rebate or cash
transfer to the citizen. Show the impact in
diagram

17

MARKET DEMAND CURVE

How to derive market demand curve from the demand of


the individual.

Show the change in consumer surplus, producer surplus


and dead weighted loss if a tax is imposed on a product.
Discuss about the revenue maximization rule of
elasticity

Economics for Managers

Consumer surplus: It is the difference between what


consumers are willing to pay and what they are actually
paying.
Producer surplus: It is the difference between the
production cost and the revenue earned.

18

You might also like