Individual, market and aggregate demand. Demand
Speaking about the factors of formation and change in demand and its values corresponding to different price levels, we have not yet distinguished between two approaches to this problem.
The first of them was related to how the demand of each individual buyer is formed (this is where, for example, the problems of subjective assessment of the usefulness of a product relate).
The second aspect is the formation of demand throughout the entire goods market certain type or the economy as a whole (this includes, for example, the demographic factor).
Now it is precisely this aspect that we will pay attention to in order to understand the logic of the market and the patterns of formation of demand quantities more deeply.
First of all, we need to draw a line between individual and market demand.
Individual demand- the demand placed on the market by an individual buyer.
Market demand- the total demand presented on the market by all buyers.
Let's count - let's think
Let's imagine that we are analyzing the audio cassette market, where purchases are made by two buyers: Andrey and Sergey. The curves describing their individual demand models are presented in Fig. 3.6.
Rice. 3.6.
It’s easy to see that Sergei’s money situation is worse than Andrey’s: Sergei is ready to buy at least one cassette only at a price below 6 units, while Andrey at a price of 6 units. ready to buy five cassettes.
But they both come to the market, and here their financial capabilities merge into a single demand. This is what the extreme graph on the right in Fig. 1 reflects. 3.7. As we see on it, up to a price level of 6 units. The market demand curve repeats the demand curve of the richest buyer - Andrey. But then Sergei’s demand begins to influence the curve of total - market - demand.
Rice. 3.7.
As a result, at a price of 4 units. market demand turns out to be already equal to 15 cassettes (ten cassettes that Andrei was willing to buy at this price, plus five cassettes that Sergei was willing to buy at that price). And so on. Consequently, market demand is the sum of the individual demands of all buyers applying for goods on a given market.
Thus, the formation and change in the values of market demand and market demand as a whole (under other constant conditions) significantly depend on:
- 1) on the number of buyers;
- 2) differences in their incomes;
- 3) the ratio of the total number of buyers of persons with at different levels income.
Under the influence of these factors, demand can either increase or decrease (the demand curve will move up to the right or down to the left) or change the patterns of formation (the shape of the demand curve will change).
The last option is illustrated in Fig. 3.8. It shows two demand curves for the same good at different countries - A And IN. Curve A describes the situation in the country's market, where incomes are distributed fairly evenly and the difference in their levels is not particularly large, so the demand curve here is quite smooth (zone 1 shows the place of the most noticeable bend). The greatest quantity of demand occurs at a sufficiently high price level (P,).
Rice.
On the contrary, the curve IN describes the situation in the market of a country where people with low incomes form a significant part of the population. And therefore, the demand schedule here sharply moves to the right (zone 2) only with very low levels prices: the largest quantity of demand occurs at price C 2.
In these purely theoretical constructions at first glance, any Russian economist will immediately recognize the situation in our country in the first years after the liberalization of prices and the beginning of a sharp decline in production. This period was marked by a sharp drop in income for a huge share of the population after decades of roughly equal earnings. The result was a change in the shape of demand curves for most consumer goods, in full accordance with Fig. 3.8, s A on IN.
This meant that the bulk of buyers were able to buy only cheap goods. But they were no longer on the market due to sharp jump prices and rapid inflation. As a result, Russians lost the opportunity to buy many types of consumer goods for several years. Domestic producers were unable to sell their products and found themselves in an extremely difficult financial situation.
Analyzing this situation in the Russian economy, we have come close to the concept of aggregate demand.
Aggregate demand- total quantity final goods and services of all types that all buyers in the country are willing to purchase within a certain time at the current price level.
The amount of aggregate demand is the total amount of purchases (expenses) made in a country (say, in a year) at the price and income levels that have developed in it.
Aggregate demand is subject to the general patterns of demand formation, which were discussed above, and therefore it can be depicted graphically as follows (Fig. 3.9).
Rice. 3.9.
The aggregate demand curve shows that with growth general level prices, the value of aggregate demand (the total amount of purchases of goods and services of all types in all markets of a given country) decreases in the same way as in the markets of individual ordinary (normal) goods.
But we know that if prices for individual goods rise, consumer demand simply switches to analogous goods, substitute goods, or other goods or services. At first glance, it is not clear how the overall demand for all goods and services can decrease, since there seems to be no switching of consumer spending here.
Of course, income does not disappear anywhere. The general patterns of consumer behavior are not violated in the aggregate demand model. They just appear here in a slightly special way.
If the general price level in a country rises significantly (for example, under the influence of high inflation), then buyers will begin to use part of their income for other purposes. Instead of purchasing the same amount of goods and services produced by the national economy, they may choose to allocate some of their money:
- 1) to create savings in the form of cash and deposits in banks and other financial institutions;
- 2) purchasing goods and services in the future (i.e., they will begin to save money for specific purchases, and not in general, as in the first option);
- 3) purchase of goods and services produced in other countries. To better understand what this looks like in practice, let's look at an example.
The patterns of changes in aggregate demand determine the entire life of the country, and therefore they are studied great attention in macroeconomics.
Let's count - let's think
Period 1990s was a time of high, galloping inflation in Russia (Fig. 3.10): the price level in 1992 was 68 times higher than in 1990, and in 2000 - 12,181 times higher!
(times, 1990 = 1.0, logarithmic scale)
Obviously such rapid growth prices could not but affect the amount of aggregate demand for goods and services in the country: theoretically, it should have fallen. And so it happened. But at the same time, having found themselves in a crisis situation, Russians began to “prepare for the worst in the future,” which manifested itself in an increase in the propensity to save. This is precisely the pattern of behavior of citizens of our country that is demonstrated in Fig. 3.11.
Rice. 3.11.
The fact is that in 1992 the Russians had real opportunity alternative uses their funds (by purchasing foreign currency as a store of income from inflation), and immediately their savings in the form of purchasing foreign currency began to grow faster than the cost of purchasing goods. This was evident in 1992-1997, when expenses for the purchase of foreign currency grew much faster than the total amount of expenses of citizens (by 8640 times, while the total amount of expenses increased by only 260 times). As a result, the share of expenses for purchasing foreign currency reached 18-20% of all expenses of Russian families. But as soon as the growth of the yen slowed down somewhat in 1998, fellow citizens (having already created small foreign currency savings “for a rainy day”) began to again spend an increasing part of their income on the purchase of goods and services, and the growth rate of foreign currency purchases fell. The acceleration of inflation in 1999-2000. once again forced Russians to spend larger sums on the purchase of foreign currency than before. In other words, in
1990s In Russia, the hypothesis of the elasticity of aggregate demand with respect to prices and the inevitability of a decrease in the magnitude of this demand with an increase in the general price level were fully confirmed.
Chapter 3 outlines the basics of consumer demand theory. We discussed the nature of consumer preferences and saw how, given existing budgetary constraints, consumers select a set of consumer goods and services that maximizes satisfaction of their needs. From here it is only one step to analyze the very concept of demand and the dependence of demand on the price of a product, the prices of other goods and income.
Let's start by studying the individual demand of individual consumers. By knowing how changes in price and income affect the budget line, we can determine how they affect consumer choice. We can also construct a consumer demand curve for a good. We will then see how individual demand curves can be aggregated into one to construct the market demand curve for that good. In this chapter, we will also study the characteristics of demand and see why the demand for some types of goods is different from the demand for other goods. We will show how demand curves can be used to measure the effect people receive when they consume a good above or below what they spend. Finally, we briefly introduce methods that can be used to obtain useful empirical information about demand.
Individual demand
This section shows how to obtain an individual consumer's demand curve given consumer choice under a budget constraint. To illustrate this, we will limit ourselves to goods such as clothing and food.
PRICE CHANGES
Let's start by studying how human consumption of food and clothing changes under the influence of changes in food prices. Rice. 4. Ia and 4.Ib show the consumer choice on which a person is based
Creeding
"price-consumption"
Food product, units
Foodstuffs
Rice. 4.1. Effect of price changes
is defined when it distributes a fixed income between two goods when food prices change.
Initially, the price of food was $1, the price of clothing was $2, and income was $20. The utility-maximizing consumer choice is at point B in Fig. 4.Ia. Here is the consumer
purchases 12 units of food and 4 units of clothing, which allows him to achieve the level of utility determined by the indifference curve with a utility value equal to H 2.
Let's look now at Fig. 4.Ib, which shows the relationship between the price of food and the quantity required. The amount of goods consumed is plotted on the x-axis, as in Fig. 4. Ia, but the y-axis now shows food prices. Point E in Fig. 4.Ib corresponds to point B in Fig. 4. Ia. At point E, the price of food is $1 and the consumer buys 12 units of food.
Let's assume that the price of food increases to $2. As we saw in Chap. 3, budget line in Fig. 4. Ia rotates clockwise, becoming 2 times steeper. The relatively higher price of food increased the slope of the budget line. The consumer now achieves maximum utility at point A, which is located on the indifference curve Hi (since the price of food has risen, the consumer's purchasing power and achieved utility have decreased). So, at point A the consumer chooses 4 units of food and 6 units of clothing. As can be seen from Fig. 4.Ib, the modified consumption choice corresponds to point D, which shows that at a price of $2, 4 units of food will be required. Finally, what happens if the price of food will decrease to $0.50? In this case, the budget line rotates counterclockwise, so that the consumer can achieve a higher level of utility corresponding to the indifference curve From in Fig. 4. Ia, and will choose point C with 20 units of food and 5 units of clothing. Point F in Fig. 4.Ib corresponds to a price of $0.50 and 20 units of food.
DEMAND CURVE
The exercise can be continued to cover all possible changes in food prices. In Fig. 4.Ia price curve- consumption" corresponds to utility-maximizing combinations of food and clothing at each food price. Note that as soon as the price of food falls, the achieved utility increases and the consumer buys more food. This model increasing consumption
goods in response to a price reduction is typical for almost all situations. But what happens to clothing consumption when food prices fall? As Fig. 4. Ia, clothing consumption may rise or fall. Consumption of both food and clothing may increase because lower food prices increase consumer purchasing power.
Demand curve in Fig. 4.Ib represents the quantity of food that a consumer buys as a function of the price of food. The demand curve has two important properties.
First, the level of utility achieved changes as we move along the curve. The lower the price of the product, the higher the level of utility (as can be seen from Fig. 4. Ia, the indifference curve is higher when the price falls).
Second, at each point on the demand curve, the consumer maximizes utility by satisfying the condition that the marginal rate of substitution of food for clothing is equal to the ratio of food and clothing prices. As the price of food falls, the price ratio and the marginal rate of substitution also fall. In Fig. 4.1, the price ratio decreases from 1 ($2/$2) at point D (since curve I represents a tangent to the budget line with a slope equal to -1 at point B) to "/2 ($I). / $2) at point E and to "D ($0.5/$2) at point F. Since the consumer is maximizing utility, the marginal rate of substitution of food for clothing decreases as we move down the demand curve. This property justifies the intuition because it indicates that the relative cost of food falls when the consumer buys it in larger quantities.
The fact that the marginal rate of substitution varies along the individual demand curve tells us something about the benefits that consumers receive from consuming goods and services. Suppose we are looking for an answer to the question how much a consumer is willing to pay for an additional unit of food when he consumes 4 units of food. Point D on the demand curve in Fig. 4.Ib gives the answer to this question: $2. Why? Since the marginal rate of substitution of food for clothing is 1 at point D, one additional
Income-consumption curve
Food products, units
Food^units
Rice. 4.2. The influence of income on consumer choice(s) and demand (b)
One unit of food costs one additional unit of clothing. But one unit of clothing costs $2.00—this is the cost, or marginal benefit, of consuming an additional unit of food. Thus, as we move down the demand curve in Fig. 4.Ib, limit norm
substitution decreases and the price that the consumer is willing to pay for an additional unit of food falls from $2 to $1 to $0.50.
CHANGE IN INCOME
We have seen what happens to food and clothing consumption when the price of food changes. Let's now see what happens when income changes.
The effects of a change in income can be analyzed in the same way as a change in price. Rice. Figure 4.2a shows the consumer choice that the consumer makes when allocating a fixed income to food and clothing, when the price of food is $1 and clothing is $2. Let the consumer's initial income be $10.00. Then the utility-maximizing consumer the choice is at point A, at which the consumer buys 4 units of food and 3 units of clothing.
This choice of 4 food units is also shown in Fig. 4.2b at point D on the demand curve di. The Di curve is the curve we draw if income remains at $10, but the price of food is changing. Since we hold the price of food constant, we see only one single point D on a given demand curve.
What happens if the consumer's income increases to $20? Then the budget line will shift to the right parallel to the original budget line, allowing us to achieve a level of utility corresponding to the indifference curve I2. Optimal choice The consumer is now at point B, where he buys 10 units of food and 5 units of clothing.
In Fig. 4.2b this food consumption corresponds to point E on the demand curve D2 (D2 is the demand curve that we derive if income is fixed at $20, but the price of food varies). Finally, note that if income increases to $30, the consumer's choice turns to point C, with a consumer goods bundle consisting of 15 units of food (and 7 units of clothing) represented by point F in Fig. 4.2b.
This exercise could be continued to cover all possible changes in income. On income-consumption curve(Fig. 4.2a) all utility-maximizing combinations of food and clothing associated with a particular level of income are located. The income-consumption curve moves in the direction from bottom left to top right because consumption of both food and clothing increases with income. Previously, we saw that a change in the price of a good corresponded to a movement along the demand curve. Everything is different here. Since each demand curve corresponds to a different level of income, any change in income must lead to a shift in the demand curve itself. Thus, point A on the “income - consumption” curve in Fig. 4.2a corresponds to point D on the demand curve D 1 in Fig. 4.2b, and point B corresponds to E on the demand curve D 2. An upward sloping income-consumption curve implies that an increase in income causes the demand curve to shift to the right, in this case: di to D 2 and to E> 3.
When the income-consumption curve has a positive slope, the quantity demanded increases with income, and the income elasticity of demand is positive. The greater the shift to the right of the demand curve, the greater the income elasticity of demand. In this case, the goods are considered normal: consumers want to buy more of these goods as their incomes rise. In some cases, demand falls As income increases, the elasticity of demand is negative. We consider such goods low quality Term "low quality" is not a negative characteristic, it simply means that consumption decreases when it increases
A ° X For example, a hamburger may not be an inferior good to a steak, but people whose incomes increase may want to buy fewer hamburgers and more steaks. A
In Fig. Figure 4.3 shows the income-consumption curve for a low-quality product. At relatively low levels of income, both hamburger and steak are normal goods. However, when income rises, the income-consumption curve bends back (from B to U. This happens because hamburger has become an inferior good - its consumption decreased when income increased.
Hamburgers, units
Rice. 4.3. The effect of changes in income on the consumption of low-quality goods
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This is the demand for a given product from an individual buyer. There are three possible configurations of individual demand lines: the traditional straight line with a negative slope, the convex demand curve discussed above, and the stepped demand line (Fig. 2.4).
When characterizing these types of demand curves, it should be borne in mind that individual demand necessarily has two limiters: a prohibitively high price (P*), above which the buyer does not agree or is unable to purchase this product at all, and the maximum possible volume (SG)> which is determined by the general need of the buyer for a given product.
Rice. 2.4.
A - straight line; b - convex curve; V- stepped broken line
Leaving aside the linear and convex types of the demand curve, with which we are already familiar, let us pay attention to its stepwise intermittent form, shown in Fig. 2.4. This type of demand curve is due to two interrelated circumstances. Firstly, the insufficient divisibility of goods. Here we're talking about not so much about such large piece goods, such as refrigerators, televisions, cars, etc., but about absolutely divisible goods, which are most often sold in a certain packaging - kilogram bags of flour, sugar, bottles of soft drinks, etc. Secondly, the gradation of the demand line is influenced by the so-called consumer sensitivity threshold, which is associated with the fact that no price will force the average buyer to demand that the seller weigh out, for example, exactly 9981" of sugar. Most likely, the buyer will want to buy either 1 kg, or some other rounded value of the weight of a given product. That is why the individual demand line, reflecting the dynamics of changes in the volume of demand, most often does not change continuously when prices change, but discretely, with certain gaps.
As for market demand, it represents the demand for a product from all buyers. Define it quantitative characteristics can be achieved by summing the individual volumes of purchases of goods by all consumers at each possible price level. You can derive market demand from individual demands using a tabular or graphical method. An example of the first method of determining market demand is presented in table. 2.3.
This table shows a hypothetical market for a product in which there are only two consumers. By adding up the quantities of goods purchased by each of them at given prices, we determine the volumes of market (i.e., total) demand corresponding to these prices.
Using the data from table. 2.3, you can build a graph of market demand. In Fig. 2.5 a graphical representation of the individual demands of two consumers is represented by the corresponding lines O x O ( and /) 2 /) 2 . Market Demand Line yay obtained by summing the horizontal segments formed between the price axis ( OR) and individual demand lines /),0, and /) 2 1) 2 for each specific price value.
Table 2.3
Determining the volume of market demand
Rice. 2.5.
The market demand curve obtained in this way took, as can be seen from the figure, the configuration of a broken line. In particular, to the right of the turning point (point IN) it becomes flatter, and to the left of this point it is located at a steeper angle. This is explained by the fact that with product prices starting from 10 rubles. and above, only the first consumer has the opportunity to make purchases. Therefore, the market demand curve in its section from the point A to the point IN, determined only by the demand of this consumer. When product prices are below 10 rubles. market demand in its area from the point IN to the point WITH is formed as the sum of the demand volumes of the 1st and 2nd buyer, which makes the market demand line flatter.
If there are many buyers of the product, then the market demand curve will have many turning points, and its configuration will turn into a smoothed hyperbola (see Fig. 2.3, b). The same will happen during the formation of market demand, if individual demand represents a stepped, broken line - with large quantities of such “steps” the market demand curve will also approach a hyperbole.
If the individual demand of each consumer is specified analytically, then when summing up individual volumes, it is necessary to take into account the fact that for each consumer there is an individual prohibitive high level price (P*), at which his personal volume of demand will be equal to zero. For example, according to Fig. 2.5 prohibitive at a high price for the first buyer the price will be equal to 20 rubles, and for the second buyer this price will be equal to 10 rubles. In the above example, the analytical functions of individual demand can be written as follows:
- - for the first consumer: 0 O]= 20-R:
- - for the second consumer: ()p^= 40-4R g.
Then the market demand function in analytical form will take the form:
The law of demand is not absolute, since there is one statistically confirmed exception to its action, called Giffen's paradox K The English economist R. Giffen (1837-1910) drew attention to the fact that during the famine in Ireland in the middle of the 19th century. the volume of demand for potatoes, the price of which has increased, has increased significantly. The demand line in this case graphically displays not an inverse, but a direct relationship between the change in price and the volume of potato purchases and has not a negative, but a positive slope (Fig. 2.6).
Rice. 2.6.
The reason for this effect was that potatoes were the staple food of the Irish poor at that time. The increase in its price forced a reduction in the consumption of other, higher quality and more expensive products. Given that potatoes remained a relatively cheaper product, the volume of demand for them increased.
- In addition to the Giffen paradox, the T. Veblen effect is sometimes considered as an exception to the law of demand, the analysis of which is presented in paragraph 2.3.
A change in a consumer's income changes the amount he or she purchases. Let us trace the impact of changes in the buyer’s monetary income on the purchase of goods, making the assumption that the prices of goods, tastes and preferences of the consumer remain unchanged.
In Fig. purchase maximizing combination shown E, with income I, and prices of goods X And Y, respectively, Px 1 and Py 1. With increased income, the buyer will be able to purchase more goods X, more good Y or more than both goods, which means a new equilibrium state of the consumer E 2 .
If we connect the tangency points of the indifference curves with the budget constraints - E 1 , E 2 , E 3, showing the successive equilibrium positions of the consumer in accordance with the growth of his income, we obtain income-consumption curve or standard of living curve.
If the “income-consumption” curve is a ray emerging from the origin at an angle of 45 degrees, this means that as income increases, the consumer increases consumption and goods in equal proportions X, and blessings Y. If purchases increase disproportionately, then the slope of the curve changes. When the income-consumption curve has a positive slope, goods are called normal goods. This means that with higher incomes, more goods are purchased, with lower incomes, fewer goods are purchased.
Consumer behavior does not fit into a strictly defined, much less formalized scale of preferences for purchasing one product over another. We can only talk about general principles, which guide consumers when choosing products to purchase.
Information obtained from the income-consumption curve can be used to construct an Engel curve for goods.
E. Engel in the 19th century. established a pattern in consumer behavior, according to which, as the income of buyers increases, the consumption structure shifts towards expensive goods. Engel curve – expresses the relationship between the consumer’s monetary income and the quantity of goods purchased. At the same time, the share of income spent on purchasing essential goods decreases, and the portion of income spent on luxury goods increases.
Y
_I_
P y 3
_I_
|
P y 2 E 3
_I_ E 2
Py 1 E 1
Income-consumption curve
and construction of the Engel curve
On the one hand, a decrease in the share of expenses of the high-income part of the population spent on consumer goods does not necessarily mean that this category of citizens reduces the consumption of simple goods.
On the other hand, a shift in the consumption of rich people to the area of expensive and valuable goods can also occur through the substitution of cheaper goods and services that are “washed out” from the consumption zone. It is interesting to note that a change in the structure of consumption in accordance with Engel’s law is observed not only in connection with income already received, but even in connection with expected income. At the same time, Engel’s law is not absolute, since the structure of the needs of a number of people may not depend on the amount of income.
When considering the income-consumption curve, we assumed that the prices of goods were constant. Now let us assume income as a constant value, and take the price of the good as a variable X. Let us assume that the price of the good X decreases, i.e. Px 1 >Px 2 >Px 3, etc. Graphically, this looks like a shift of the budget constraint from the position KM 1 to position KM 2 (Fig. 6.2). A further decrease in price is reflected by the straight line KM 3. Having identified the points of tangency of the indifference curves U 1 , U 2 , U 3 with budget restrictions points E 1 , E 2 , E 3 and combining them, we get price-consumption curve.
 |
K
|
0 M 1 M 2 M 3 X
 |
Px 2 Demand curve
|
X 1 X 2 X 3
Price-consumption curve ( A)
and construction of the demand curve ( b)
Based on this curve, you can construct a demand curve (Fig. 6.2.b), in this case the price of the product is plotted on the ordinate axis X(Px), and on the x-axis is the amount of good X. When analyzing the income-consumption curve, we considered the impact of changes in income; when analyzing the price-consumption curve, we considered the impact of price changes on the relative replacement of one good with another. It is possible to determine to what extent a change in demand for a good X caused by a change in price, and in what - real income. The downward sloping nature of the demand curve reflects the law of demand: the lower the price of a product, the greater the quantity demanded. Lowering the price of goods simultaneously has twofold consequences.
The operation of the law of demand can be explained based on the concepts of the substitution effect and the income effect.
Firstly, buyers actually have increased purchasing power. They can buy more goods for less money, and they will still have enough money for additional purchases. Secondly, the consumption of cheaper goods will increase, and the consumption of relatively more expensive goods will decrease. Let's consider each of these processes separately on the graph (Fig. 6.3).
 |
K
WITH 0 . E 0 E 1
WITH 1 U 2
TO 2 E 2
WITH 2 U 1
0 X
F 0 M F 2 F 1 M 2 M 1
substitution effect income effect
The effect of consumer behavior on the market
The original budget line is indicated KM. The consumer maximizes utility by choosing a “consumer basket” (clothing and food) at a point E 0 reaching the level of utility corresponding to the indifference curve U 1 .
When the price decreases, the budget line runs along the line KM 1. Now at the point E 1 on curve U 2, the consumer chooses his bundle of goods. Consequently, a decrease in food prices allows for an increase in real income and an increase in the satisfaction of needs. First the consumer buys OF 0 units of food, after the price change food consumption increased to OF 1, i.e. increase in the volume of food purchases, represented by the segment F 0 F 1. Against this background, there is a noticeable decrease in clothing purchases from WITH 0 to WITH 1. Note that clothing is relatively expensive compared to food. This replacement is reflected by a movement along the indifference curve. The change in food consumption associated with a change in food prices, provided that satisfaction (or real income) remains unchanged, is a substitution effect. It can be measured by drawing a budget line TO 2 M 2 parallel to the new budget line KM 1, which reflects the lower relative price of food, so that it touches the indifference curve U 1. Given a budget line, the consumer purchases a set of goods at point E 2 and therefore consumes 0 F 2 units of food. Line segment F 0 F 2 represents the substitution effect, indicating an increase in the quantity of food required as its price decreases.
Substitution effect- a change in the structure of consumer demand (the ratio of funds allocated for the purchase of different goods) solely as a result of a change in the relative price of one of the goods.
Let's consider the change in food consumption caused by an increase in income and a change in price. Overall, this will have a certain impact on intermediate level prices and, therefore, the amount of real income. The buyer needs to pay less money to purchase the same amount of food. As a result, he has an additional amount of money, which is equivalent to an increase in the buyer's income. These additional funds he can spend it on purchasing any goods, including food products.
If we return to the previous graph, we can say that in this case the growth of food from OF 2 to OF 1 occurred under the influence of the income effect. Graphically, the income effect is shown in such a way that the budget line passing through the point E 2, shifts towards the budget line KM 1. The consumer now purchases a set of goods E 1 on the indifference curve U 2, not a set E 2 on the curve U 1. The income effect reflects the movement from one indifference curve to another, and thus can be used to measure the dynamics of consumer purchasing power.
Income effect is a change in consumer demand solely due to a change in real income.
In the case of normal goods, the income effect and the substitution effect are summed up, since there is an expansion of consumption of normal goods.
Distinguishing between the income effect and the substitution effect is important for understanding the patterns of pricing in a market economy and allows us to determine changes in demand when prices for goods and services rise or fall.
Assignment for the seminar.
1. Giffen effect. Income and substitution effects for Giffen goods.
Related information.
Demand, supply and their interaction
The logic of behavior of the main market subjects - buyers and sellers - is reflected by two market forces: demand And offer . The result of their interaction is a transaction - an agreement between the parties on the purchase and sale of goods and/or services in a certain quantity and at a certain price. price .
All market transactions are interconnected. If a certain product is sold to anyone at a certain price, then a similar product cannot, under the same conditions, cost more or less. One transaction affects another, demand (or supply) that appears in one place affects general condition market . In other words, competitive pricing accumulates in the price a huge amount of varied information about quantitative and quality characteristics economic processes, forms the information and incentive basis of a market economy.
Supply and demand, in a certain sense, are a market replacement (or market equivalent) of the regulatory mechanism that was characteristic of a planned economy, when it was assumed that the entire variety of economic information was known to the central planning authority. And if planners only tried, on the basis of their own “comprehensive” information, to develop the most rational ways to achieve socio-economic goals and determine the directions of action of all persons involved in economic processes, then the mechanism of supply and demand actually realizes all these goals in market economy.
Law of Demand
Demand concept
Buyers' demand for certain goods is formed under the influence needs , i.e. a person’s desire to provide for himself better conditions life. Needs are highly individual; They are different for each person and are formed under the influence of a number of factors that determine the conditions of existence:
· himself (for example, the need or lack of need for warm clothing is determined by the climate of the country, the degree of hardening of a person, his tastes);
· his family and close circle (thus, the need for education of children and the strength of its manifestation depend on the level of development of society and on the place that a given individual occupies in society);
· the social, national, religious and other community to which a person belongs (for example, the need for national defense depends on the international position of the state of which the person is a citizen).
At the same time, from the huge range of human needs, economic science is primarily interested in those that are supported by appropriate monetary capabilities, in other words, it is interested in “effective demand.” Thus, demand ¾ is the desire and ability of buyers to make transactions to purchase goods available on the market. And the quantity demanded ¾ is the quantity of goods that buyers want and can purchase at a given price within a certain time.
Law of Demand
It is well known that goods can usually be sold at a low price faster and in larger quantities than at a higher price. At the same time, increased, rush demand leads to inflated prices, and sluggish and reduced ¾ leads to their reduction. This inverse relationship between the market price of a product and the quantity that can be bought or sold at this price is called the law of demand.
According to According to the law of demand, consumers, other things being equal, will buy the greater the quantity of goods, the lower their market price. Another formulation of this law is possible: The law of demand consists of an inverse relationship between the price level and the quantity of products purchased.
Immediate prerequisites for the law of demand
The law of demand is one of the fundamental laws of a market economy. The deep reasons for its existence are rooted in the very nature of value and prices. These will be discussed later as part of the analysis of theories of value. For now, we will limit ourselves to listing the immediate prerequisites for its occurrence:
1) a decrease in price leads to an increase in the number of buyers to whom this product becomes available;
2) the same consumer can afford to buy larger quantities of cheaper goods. In the economic literature this phenomenon is usually called income effect , since a reduction in prices is equivalent to an increase in consumer income;
3) a cheaper product “pulls away” part of the demand, which otherwise would be directed to the purchase of other goods. This phenomenon also has a special name ¾ substitution effect .
Demand and price
The law of demand establishes an inverse relationship between price and the volume of products that consumers want to buy. Thus, this law proclaims price to be the main factor determining the size of demand. But economic practice convinces us of the opposite: market economy 1 demand is largely determined by price. Not by chance, if you do not take into account extreme situations, it is the price that is primarily of interest to the consumer who decides to buy a product. And all other characteristics are necessarily considered through the prism of prices (remember how we talk, for example, about such an important characteristic as quality: expensive car, but it's worth the money).
The relationship between the price of a product and the demand for it can be presented in tabular, graphical and functional ways. Let's say we know how many kilograms of sausage can be sold in a nearby supermarket in a week at various levels prices Then the relationship between at the cost And demand can be presented in table form.
The same dependence can be presented in the form of a graph in coordinates of prices for sausage (P ¾ independent variable) and the quantity of purchased sausage (Q ¾ dependent variable 2) (Fig. 4.1.). To construct a graph, we use the data from our hypothetical example (Table 4.1)
Table 4.1.A conditional example of the relationship between the size of demand for sausage and its price
Line D is called the demand curve. It shows how much quantity (Q) of a product buyers are willing to buy:
a) at each given price level;
b) in a specific period of time;
c) with other factors remaining constant.
In other words, movement along the demand curve (from one point to another) reflects the change in the quantity of a good that consumers demand as a result of a change in the price of the good.
The functional relationship between the volume of demand (Q D) and price can also be presented in analytical form, i.e. in the form of a formula
Rice. 4.1. Dependence of demand on price
However, in such general form it does not reflect the inverse relationship between demand and price, and when practical application the formula needs to be specified. For example, if the relationship is linear, it will take the form:
where a, b ¾ are numerical coefficients.
In our conditional example it will look like this:
Q D = 300 - 5R.
Individual and market demand
IN economic theory It is customary to distinguish between individual demand, as the demand of an individual buyer for a certain product, and market demand, i.e., the total demand of all buyers for each price of the product. If we denote by qij the individual demand for i-th product jth buyer, then market demand can be expressed as
where Q i ¾ market demand, n ¾ the number of buyers in the market.
The individual demand curve, like the market demand curve, has a negative slope, i.e., reflecting the already described inverse relationship between demand and price, is not smooth, but rather has a stepped appearance.
To induce a person, say, to buy two sticks of butter instead of one, a small reduction in price compared to the usual level is not enough. That is, if instead of 10 rubles. (Moscow price at the beginning of 1999) it will cost 9 rubles. 80 kopecks, then 9 rubles. 60 kopecks, then 9 rubles. 40 kopecks, then all these changes most likely will not force one specific buyer to double the purchase volume. But at some point (let’s say, at a price of 8 rubles) he will react by increasing the quantity of product purchased. A jump in demand, a “step,” will appear on the graph. Since the “sensitivity threshold” is different for consumers, when summed up, the stepwise individual demand curves will smooth each other out and ultimately create a smooth market demand curve.