Pindyck_8e_Chapter 4
Chapter 4
Individual and Market Demand
Teaching Notes
Chapter 4 builds on the consumer choice model presented in Chapter 3. Students find this material very abstract and “unrealistic,” so it is important to convince them that there are good reasons for studying how consumers make purchasing decisions in some detail. Most importantly, we gain a deeper understanding of what lies behind demand curves and why, for example, demand curves almost always slope downward.
The utility maximizing model is also crucial in determining the supply of labor in Chapter 14, general equilibrium in Chapter 16, and market failure in Chapter 18. So play up these applications when selling students on the importance of the material in this chapter.
Section 4.1 focuses on graphically deriving individual demand and Engel curves by changing price and income. Section 4.2 develops the income and substitution effects of a price change and explains the (perhaps mythical) Giffen good case where the demand curve slopes upward. Section 4.3 shows how to derive the market demand curve from individuals’ demand curves. The remaining sections cover consumer surplus, network externalities, and empirical demand estimation.
When discussing the derivation of demand, review how the budget line pivots around an intercept as price changes and how optimal quantities change as the budget line pivots. Most of the diagrams in the book analyze decreases in price, so you might want to go over an example in which price increases. This will come in handy if you later go over the effects of a gasoline tax in Example 4.2. 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 another unit. This is important for understanding consumer surplus in Section 4.4.
Income and
Individual and Market Demand
Teaching Notes
Chapter 4 builds on the consumer choice model presented in Chapter 3. Students find this material very abstract and “unrealistic,” so it is important to convince them that there are good reasons for studying how consumers make purchasing decisions in some detail. Most importantly, we gain a deeper understanding of what lies behind demand curves and why, for example, demand curves almost always slope downward.
The utility maximizing model is also crucial in determining the supply of labor in Chapter 14, general equilibrium in Chapter 16, and market failure in Chapter 18. So play up these applications when selling students on the importance of the material in this chapter.
Section 4.1 focuses on graphically deriving individual demand and Engel curves by changing price and income. Section 4.2 develops the income and substitution effects of a price change and explains the (perhaps mythical) Giffen good case where the demand curve slopes upward. Section 4.3 shows how to derive the market demand curve from individuals’ demand curves. The remaining sections cover consumer surplus, network externalities, and empirical demand estimation.
When discussing the derivation of demand, review how the budget line pivots around an intercept as price changes and how optimal quantities change as the budget line pivots. Most of the diagrams in the book analyze decreases in price, so you might want to go over an example in which price increases. This will come in handy if you later go over the effects of a gasoline tax in Example 4.2. 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 another unit. This is important for understanding consumer surplus in Section 4.4.
Income and