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Lecture

Demand Analysis: Willingness to Pay and Elasticity

Description

This lecture discusses the concept of demand through the lens of willingness to pay, using examples such as a natural park visit and the impact of price changes on consumer behavior. The instructor presents a table illustrating Paul's willingness to pay for park visits, analyzing how rational decisions are made based on entry ticket prices. The discussion extends to the elasticity of demand, particularly in the context of tobacco taxes in France, where price increases led to a significant decrease in cigarette sales. The instructor emphasizes the importance of understanding the reasons behind changes in demand, including the income effect and substitution effect. Graphical representations of demand shifts due to external factors, such as weather and insulation improvements, are also explored. The lecture concludes with practical exercises involving the demand for photovoltaic panels, highlighting how price influences consumer choices and total market demand. Overall, the session provides a comprehensive overview of demand theory and its real-world applications.

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Instructor

Philippe Thalmann

Philippe Thalmann was born in Lausanne in 1963. He graduated in Economics from the University of Lausanne in 1984, where he earned a postgraduate diploma in Economics in 1986. Mr. Thalmann entered the doctoral program in Economics of Harvard University (Cambridge, U.S.A.) in 1986, which he completed with a Ph.D. in 1990. His dissertation is entitled: "Essays in the Economics of Government Revenues and Spending". Returning to Switzerland, he was hired as an assistant professor first at the University of Geneva (teachings in Public Economics), then at the University of Lausanne (teachings in Econometrics and Introductory Economics). Since 1994, Mr. Thalmann is associate professor of Economics as the Swiss Federal Institute of Technology at Lausanne.

Official source

Related concepts (32)

In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item is a function of an item's perceived necessity, price, perceived quality, convenience, available alternatives, purchasers' disposable income and tastes, and many other options. Innumerable factors and circumstances affect a consumer's willingness or to buy a good.

In a demand schedule, a demand curve is a graph depicting the relationship between the price of a certain commodity (the y-axis) and the quantity of that commodity that is demanded at that price (the x-axis). Demand curves can be used either for the price-quantity relationship for an individual consumer (an individual demand curve), or for all consumers in a particular market (a market demand curve). It is generally assumed that demand curves slope down, as shown in the adjacent image.

In microeconomics, the law of demand is a fundamental principle which states that there is an inverse relationship between price and quantity demanded. In other words, "conditional on all else being equal, as the price of a good increases (↑), quantity demanded will decrease (↓); conversely, as the price of a good decreases (↓), quantity demanded will increase (↑)". Alfred Marshall worded this as: "When we say that a person's demand for anything increases, we mean that he will buy more of it than he would before at the same price, and that he will buy as much of it as before at a higher price".

Cross elasticity of demand

In economics, the cross (or cross-price) elasticity of demand measures the effect of changes in the price of one good on the quantity demanded of another good. This reflects the fact that the quantity demanded of good is dependent on not only its own price (price elasticity of demand) but also the price of other "related" good. The cross elasticity of demand is calculated as the ratio between the percentage change of the quantity demanded for a good and the percentage change in the price of another good, ceteris paribus:The sign of the cross elasticity indicates the relationship between two goods.

Price elasticity of demand

A good's price elasticity of demand (, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elasticity gives the percentage change in quantity demanded when there is a one percent increase in price, holding everything else constant. If the elasticity is −2, that means a one percent price rise leads to a two percent decline in quantity demanded.