Buyers in Markets The demand curve o Why do buyers purchase a greater quantity at lower prices and vice-versa? e The substitution effect ◆ The income effect Chapter 3-Supply and Demand: An Introduction Slide 16
MB MC Chapter 3 - Supply and Demand: An Introduction Slide 16 Buyers in Markets ◼ The Demand Curve ⚫ Why do buyers purchase a greater quantity at lower prices and vice-versa? ◆The substitution effect ◆The income effect
Buyers in Markets The substitution effect The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes The income effect The change in the quantity demanded of a good that results because a change in the price of a good changes the buyers purchasing power Chapter 3-Supply and Demand: An Introduction Slide 17
MB MC Chapter 3 - Supply and Demand: An Introduction Slide 17 Buyers in Markets ◼ The Substitution Effect ⚫ The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes ◼ The Income Effect ⚫ The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer’s purchasing power
Buyers in Markets Price (s per slice) The buyers reservation price: The largest dollar amount the buyer would be willing to pay for a good 3 Demand Quantity 8 2 (1000s of slices per day) Chapter 3-Supply and Demand: An Introduction Slide 18
MB MC Chapter 3 - Supply and Demand: An Introduction Slide 18 Buyers in Markets Price ($ per slice) Quantity (1000s of slices per day) Demand 8 12 16 The buyers reservation price: The largest dollar amount the buyer would be willing to pay for a good 4 2 3
Buyers in Markets a The Cost-Benefit Principle The reservation price is the benefit the buyer receives from the good The cost of the good is its market price o If the reservation price(benefit) exceeds the market price(cost) the consumer will purchase the good o At higher prices, benefit will exceed cost for a smaller quantity than at lower prices Chapter 3-Supply and Demand: An Introduction Slide 19
MB MC Chapter 3 - Supply and Demand: An Introduction Slide 19 Buyers in Markets ◼ The Cost-Benefit Principle ⚫ The reservation price is the benefit the buyer receives from the good ⚫ The cost of the good is its market price ⚫ If the reservation price (benefit) exceeds the market price (cost) the consumer will purchase the good ⚫ At higher prices, benefit will exceed cost for a smaller quantity than at lower prices
Buyers in Markets s Horizontal Interpretation Price (s per slice) Price determines quantity demanded 3 Demand Quantity 8 2 (1000s of slices per day) Chapter 3-Supply and Demand: An Introduction Slide 20
MB MC Chapter 3 - Supply and Demand: An Introduction Slide 20 Buyers in Markets * Horizontal Interpretation Price determines quantity demanded Price ($ per slice) 4 2 3 8 12 16 Demand Quantity (1000s of slices per day)