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1、CHAPTER 4INDIVIDUAL AND MARKET DEMANDTEACHING NOTESChapter 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
2、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 P
3、arts 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 t
4、he 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 a
5、nother 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
6、(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
7、 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 th
8、e 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 de
9、mand 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 consumers are in the market at all prices.The concept of elasticity is reintroduced and expanded upon. In particu
10、lar, the relationship between elasticity and revenue is explained. Many students find elasticity to be a mysterious and puzzling concept. Point out that it is merely a more precise measure than the slope of the curve to measure the response of quantity demanded to a change in price, because it is a
11、unit free measure. One effective teaching method is to use a linear demand curve to show that while the slope is constant, the elasticity changes throughout the range of prices. The text relies on this relationship in the discussion of the monopolists determination of the profit-maximizing quantity
12、in Chapter 10.Although this chapter introduces consumer surplus, it is not extensively discussed until Chapter 9; producer surplus is covered in Chapter 8. If you introduce it here, it may be necessary to review it again when you get to Chapter 9.Finally, there are other special topics in this chapt
13、er and its Appendix that you might cover, time and interest permitting. An application of network externalities is given in Example 4.6. The first part of Section 4.6, “Empirical Estimation of Demand,” is straightforward, particularly if you have covered the forecasting section of Chapter 2. However
14、, the last part, “The Form of the Demand Relationship,” is difficult for students who do not understand logarithms. The Appendix is intended for students with a background in calculus, and contains a brief mathematical treatment of demand theory.QUESTIONS FOR REVIEW1. Explain the difference between
15、each of the following terms: a. a price consumption curve and a demand curve; A price consumption curve identifies the utility maximizing combinations of two goods as the price of one of the goods changes. When the price of one of the goods declines, the budget line will pivot outwards, and a new ut
16、ility maximizing bundle will be chosen. The price consumption curve connects all such bundles. A demand curve is a graphical relationship between the price of a good and the (utility maximizing) quantity demanded of a good, all else the same. Price is plotted on the vertical axis and quantity demanded on the horizontal axis.b. an individual demand curve and a market demand curve; An individual demand curve identifies the (utili
