exercise all the data
on the weekend and make some decisions so
the other main thing I announced in
Brightspace yesterday was regarding the homework
policy so if you recall originally I wanted
to make this repeat thing per question
McGraw Hill doesn't allow me to do that so
instead what I'm doing is you have unlimited
attempts at the homework but each attempt
you lose 1% which is pretty small so you can
have as many attempts as you want and it's
your best score minus how many attempts
you had so if you get a 78 on the first one
you can have another go and get like a 94
and then you'll lose one percent so 93 overall
in that example if you took two attempts
to get the 94 then you get 92 essentially
i just want you to be able to go over your
mistakes as many times as possible and get
the right answer in the end i need obviously
some incentive in place to take it
seriously the first time around but i do think
it is quite fair and lenient and the way
I've hopefully set it up you can let
me know if it's not like this is that
after you finish it it will show you all
your answers or show you what you got wrong
so you don't have to redo every
question from scratch you can just go to
the ones you got wrong and have a have
another go at them so the first homework is
meant to come out on Sunday but I'm gonna
put it out on Monday and I'll give you an
extra day for it as well just because we're
not going to cover absolutely everything
on the homeworks today so I don't want
anyone to do it without having gone over the
content in class. Any questions about
that or anything else? Okay, great. Let's
get started. So I was on Twitter last
night, as I like to do before bed, which
is a terrible habit, but I do it. And I
came across his tweet, dogs who sleep on
their owner's beds have a 45% longer life
expectancy than dogs who don't, and scientists
have no idea why. And what we kind of do,
as Jody Beggs points out here as you can
probably tell by her tag Jodi Econ Girl she's
familiar with causal inference and economics
and she knows that a study like this does
not have any causal relation there's a lot
of selection effects and as she says here
people who let their dogs in the bed likely
treat them better in other ways as well so
people who let their dogs sleep in the bed
probably more likely to pay for them to go
to the vet spoil them etc etc so this could
be the reason why dogs that sleep on the bed
predicted to live 45 % longer in terms of
their life expectancy. So it has nothing to
do with the magical bowels of sleeping on the
bed as a dog, it's the selection effects of
the owners who let their dogs sleep on the
bed. So I thought I'd reinforce this correlation
is not causation point and whenever I
see something like this I'll probably throw
it into a lecture just to keep reinforcing these
ideas as we go along so we finished up last
class by looking at the demand curve and
we constructed our own demand curve as we
can tell by Michael's coffee and croissant
there so thank you for the payment in advance
Michael but all this is at the end of the day
what a demand curve is it's just everyone's
willingness to pay for some sort of item or
some sort of good and we just add it all
together and we'll get back to this when we talk
about consumer surplus but essentially when
when it was free everyone stood up if
you remember so at zero dollars 80 people 80,000
in this example stood up but once we got to
a price of like seven dollars then demand
reduced a lot of people started sitting down
some people still were willing to pay and
that's why we still have people demanding it but
by the law of demand less people will demand
it as the price gets higher so as we know
the demand curve doesn't stay constant it can
change in two ways so if we change only the
price of the good if nothing else changes
this leads to a change in the quantity of
that good demanded and this type of change is
graphically represented by movement along a given
demand curve holding other factors in
impact demand constant so if there's a price
increase from $20 here to $25 we move up and
left on the demand curve to here at this higher
price we see there's only 30,000 quantity
demanded compared to 40 so this is a reduction
in demand so we'll get into this probably
in the next class but if there's a shift
in supply then there's going to be a new
equilibrium and we've moved along the demand curve
we haven't shifted the demand curve so just
a change in price so we move along on the
other hand there's a lot of other factors
that can affect demand. So changing these
factors other than price is graphically
represented by a shift of the entire demand
curve. So it can either increase demand
or decrease demand. So if there's some sort
of shift that isn't specifically price
related to that good that increases demand
we shift it up and to the right and as
you can see at this price point here that
means at the same price point more
people demand the good. also at the same quantity
the price is going to be higher as well
there are more people that want it and vice
versa if demand is decreasing we shift it
down and to the left and the same price
point as before less people want the good
and as you can see well these don't actually
intersect as you can see but like if we drew
this all the way down here like that would
go down here you can see the same quantity
the price is going to be a lot lower as
well so we've already talked about what
movement along the demand curve is but here are
a number of different things that can shift
the demand curve. So we've got income,
prices of related goods, advertising
and consumers' tastes and preferences, the population size, expectations about
the future and then the etc.
Everything else. So we define goods in
two different ways in economics. We have
normal goods and we have inferior goods. And
the definition of a normal good is that
demand of normal goods increases as someone's
income rises. They want more of this as they
get richer. So a well common fact about the
world is if you look at a lot of developing
countries and their growth in the 20th century
as people got richer they switched away
from things like rice and potatoes and bought
more meat. So there's been a large increase
in consumption of things like beef and
and and and chicken and fish as people got
richer so the more income people have the more
they want to spend on these types of foods
so demand increases their normal goods
another is airline travel so I saw some discourse
recently someone saying why does no one
dress nicely on aeroplanes anymore so if you
look at photos from the 40s and 50s everyone
would dress up like they were going out
on a you know a fancy date or something like
that everyone's in suits and dresses and
now everyone wears what tracksuit pants and t
-shirts on airplanes. The reason is we're
richer now. We can afford airline travel
a lot more. And it's not a special thing.
We just want to be comfortable when
we fly. So airline travel is something
we've demanded more of as we've gotten richer
as time goes on. Another is obviously
something like designer clothes and
these premium brands, etc. The more money
you have, the more people are going to
want these things. On the other hand,
inferior goods are defined as the
demand of these types of good falls
when income rises. When you get richer,
you actually buy less of these when
you have less money. It's because you're
usually substituting away towards these
other things. So when you've got
less income and when you're a uni student
or a college, you're probably buying a lot
of instant noodles. I bought a lot of
instant noodles back in the day. I don't
think I've bought instant noodles in
years since I had an income after grad
school. So as you get richer you're less
likely to buy these and it's the same thing
in the story of the Developing countries
before as people got richer they had more of
an appetite for steak But less of an appetite
for potatoes, so they bought less
potatoes as I got richer Same thing comparing
airline travel and bus travel back in the day
people would take buses You know I mean people
still do but a lot of people take buses
interstate for hours or days to get to a
destination But as you get more money You're
probably not going to take those buses anymore,
and you're more likely to fly so buses are bus
travel long distance is an inferior good
and the opposite of designer clothes I guess
is just generic brands etc the more money you
get the less likely you'll buy these generic
clothes and you'll substitute away from
from to designer clothes so the richer you
get this is going to affect your demand but
different types of goods depending on if we
define them as a normal good or an inferior
good and we've already kind of mentioned this
the prices of related goods goods can be a
substitute or a complement I've got some examples
on the next page that help reinforce
it and the changes in prices of these related
goods can generally shift the demand curve
not so the supply curve the demand curve as
the good of interest that we're analyzing is
either relatively more or less attractive so
it's similar type of good that people may
consume instead of the good of interest is
a substitute so let's say we're interested
in good X we can let's look at Coca-Cola for
example and the the substitute for Coke a
lot of the time is Pepsi. So if the price
of Pepsi rises, people who are kind
of indifferent between the two will be
like, why would I pay more for Pepsi when
Coke stayed the same price? I'm going to
now buy a Coke instead of the Pepsi. So people's
purchasing decisions when it comes to
substitutes is kind of looking at them in
this relative sense. So if the price of
the substitute rises, people are more
likely to increase their demand for
this good that we're analysing,
and vice versa. Similarly, a good
that is purchased or used with another
good is a complement. So we talked about
dips and chips earlier. If you're a dip
salesman and for some reason there's a
large increase in the amount of chips people
are buying, people need to dip their
chips in something. So they're more likely
to buy your chips as well, sorry,
your dips as well, because it's a complement
to these chips. So the demand for
the complement rises. The demand is for
the unit that we're interested in or the
good we're interested in is also going to
rise, and vice versa if the demand for
the complement falls. So I've got a couple
of examples here to help drive the point
home. Milk and cereal. I don't know people
who eat cereal dry. I don't even want to
know if people do that. These are very well
-known complements. Pizza and beer. I
assume a lot of you here are under 21,
and I don't like the law here that you
have to be over 21 to drink. Back home is
18. In Germany, you can drink beer at 16.
So in Germany, pizza and beer becomes a
complement very early on. For a few of
you will be probably this year or next
year when you turn 21 peanut butter and jelly another famous
compliment and Printer ink and
printers. So I think they used to be a stat I
don't know if it's still true or not that the
most expensive liquid by like cubic centimeter
in the world was printer ink like More
expensive than like liquid gold and other
things. So yeah, like If you want to like
print you need to buy this thing So the
more people that owned printers, as the technology
became cheaper, were more likely to buy a
printer ink as well. And as we said, Coke
and Pepsi clearly substitutes, even
though I would never drink Pepsi, no
matter how much Coke costs. That's how
much I prefer Coke. Pizza Hut and
Domino's, I don't know what your preferences
are, but if one of them increases in
price, you're probably more likely to
buy the other one. And also, this is where
I think it's interesting in terms of product
differentiation. some people argue things
like iPhones and and you know androids are
actually substitutes but I know some people
that would never touch an Android in their
life that would never move away from their
iPhone even though iPhones are usually twice
the price so whether you want to see these
things as substitutes or not differs
depending on the context and to drive the point
home I have this nice little advertisement
about substitutes it's a very clever little
ad showing that yeah ipads and new tech as
substitutes for a lot of things we use paper
for but clearly not a substitute for for
toilet paper so you should buy our toilet
paper so that's a cute little ad that brings
you know home the idea of what's a
substitute and what isn't speaking of advertising
um another thing that can shift the demand
curve is advertising consumer tax so is
anyone here a marketing major by any chance
anyone in this class um well i'm gonna to
probably rag on marketing a little bit here so I
know it's a marketing major so marketing
can be really useful don't get me wrong and
the noble reason why advertising changes
demand is there are a lot of things that we
don't know about and advertising informs us
about products that exist that we didn't know
existed that make our lives better so for
example back in in in 2019 I didn't really know
air purifiers were a thing but when COVID
came around it was advertised a lot and
even without the pandemic now if any of you come
to my office hours I always have an air
purifier running I think it's really important
just for health and well-being so that's
something that advertising helped me with and
there's a lot of things that we learn about
through advertising however there's a more
nefarious thing underbelly of advertising
advertising can alter the underlying tastes
of consumers in other words it can change our
preferences for better or for worse so for
example I'll show you a video of this in a
second when I was younger I looked at a lot
of ads and there's always like these um
power tool ads saying your father wants this for
like Father's Day so I remember buying my
dad power tools when I was younger my dad
has never done a DIY project in his life I was
just influenced by the advertising because
I assume that's what you know men want power
tools so I was affected a lot by advertising
and as you'll see in this video here
you can do things like appeal to identity to
manipulate people and change what they want so
marketing is extremely powerful but whether
it's it's good or not in the abstract is an
interesting question with delicious rewards
you points for doing what you love digging
into your culver's favorites this is
mark rapaport marky sparky toys and of
all the products he's invented one stands out
as the absolute worst the doink it is a
strange ball that doesn't do much and
unfortunately for mark it hasn't been the biggest
seller either it's not all fun it's all
fun and games until nobody buys your toys
but as far as i'm concerned the quality
of the toy shouldn't matter when you're
selling to kids so i paid mark a visit with a
way to get those don't get sold when you're
a kid what's the one thing you want more
than anything power no to not be seen as
a baby it's very easy to market to kids
because their brains are so small so rather
than selling a ball mark should be selling
an identity for children that identity that
owning a doinket is the only way to prove
you're not a baby. No. No. This is
Marketing 101. According to you. Well, that's what
sells products. Fantastic. Fantastic. I am so excited. Am I sensing
some sarcasm? Yes. Mark wasn't
convinced and said there was only
one thing that could win him
over. Cash. Money. I needed to show that
this would be profitable. So later that week,
I arranged a focus group to see if my
marketing approach would work with actual
children. When I show this to you, what do you
think? Do you want it? Nope. Nah. Why? Dumb. It's dumb? Yeah. Okay. Oh, hold on
a second, guys. I just got a call. Hello? Oh, yes, sir. Really? Oh, my God. Yeah,
I'll let them know. Sorry, guys, that was
the president calling, and he just told me
that owning this toy is now the only proof
you're not a baby. Well, I mean, I
have one, so that's good. Are you guys
babies, or...? Nope. Nah. Well, you don't have the toy, so you
must be a baby. Unless you have it,
then you're not. Oh, okay, so now
you two aren't babies, but
are you a baby? Are you a baby? No. Well, you don't
have the toy. What do you think about kids that don't have the toy? Sad. Sad? Weird. Why? Because they're a baby. The strategy worked
even better than I had hoped, so I
rebranded the toy's packaging and
brought it to Mark to see what he thought.
It's horrible. I mean, what
specifically? A kid in a diaper
with children pointing at him. If this is
the best you've got, you're awful. I mean, I'm putting
a lot of effort and resources into
trying to sell. Well, you're not
good at what you do. You're not good
at what you do. Working with Mark
was about as much fun as playing with
his toys. But I was convinced I could win
him over if I showed him results. So I
wrote and shot a professional TV commercial
for the Doinkit that was guaranteed to
get kids to buy it. Between the ages
of three and eight, please
listen closely. Owning a Doinkit
is now the only proof that you
are not a baby. If you don't have
this toy, people will think you wear diapers
and cry all the time. Everybody will
think you sleep in a crib and
drink from a bottle if you don't have
one of these. Whatever you
speak, all people will hear is goo
-goo and ga-ga. So tell your mom or dad to buy you a doinket. Because otherwise,
as far as anyone's concerned,
you're a baby. So it goes on, and
he ends up actually selling a lot of
them. Obviously, it's quite nefarious.
So I don't know if anyone's seen
this show before. It's called Nathan
For You. Nathan Field is a comedian. He
pretends to be a business consultant and he
helps these small businesses by giving
them these weird and wacky ideas. A lot of
the time it actually works in some ways.
His most famous one you might have heard
of is called Dumb Starbucks. Has anyone
heard of this before? So he's helping this
local coffee shop that was struggling with
their marketing. And he came up with this
idea that you can just steal Starbucks'
branding if you use parody law. So he
just copied Starbucks entirely and just put
the word dumb in front of everything. So you
could order like a dumb latte or a dumb,
you know, scone or something like that.
And it got shut down after a week, but he
went viral for that. Hilarious show,
highly recommend it. But going back to
what we're talking about, clearly this
is an absurd example of shifting
people's, you know, tastes and preferences
to buy something based on appealing
to their identity. And that probably
happens to us a lot when looking at
advertising. They're very good at what they
do. So advertising can change people's
tastes all the time. And when people
spend on advertising, what it does is it
can shift demand up and to the right,
increasing it, resulting in more
people wanting the product for the same
price as before. So as you can see
here, originally $40,000, $50,000
people wanted it. Then advertising
happened, now $60 ,000 people wanted
that price. More people value the
product than before. And at the old
price, sorry, the old quantity at $50
,000, people would be actually willing to
pay more for it now. The next one
is population. So how many people
exist will by definition affect the demand for
products. So holding all else constant, the
larger the population, the more likely it
is that people want to buy your product.
It can't be less, it has to be more, at
least zero or more. And it's the same thing,
if less people exist, demand for that product
should decrease. So in the early
1900s, Dr Paul Ehrlich wrote
this famous book called The
Population Bomb, which ended up being
kind of a scare campaign that we're
going to overpopulate, there's going to
be competition for resources, and if anyone
studied any history of economic thought,
we'd get into these Malthusian traps where
people would starve. And a lot of
politicians read this book and enacted
policies in line with Ehrlich's research, such
as forced sterilization to try and get the
birthright down. So policies like
that, even though they are repugnant in
certain ways, would lower the population,
which results in less demand for certain
goods. So population control policies
like that are going to reduce demand
for certain goods. Another important
thing to consider is the demographics of
the population. and I want to talk about
that. I'm going to show you a slide on
the next page of the population distribution
of ages in Japan. And the more people
in a certain segment of this distribution
will result in higher or lower demand
for different goods. So if you've got
more people that are younger in their early
20s, you're going to probably have more
demand for things like beer, vodka,
etc., more party, fun -related things. For
people in their 30s and 40s, like me and
my friends, You're probably going to get
more people demanding things like like
real estate and also Optometry appointments
things that you get in your 30s and 40s And
if you have a lot of people in the 80s
You're going to get more demand for things that
old people need or want such as you know
hip replacements is what I came up with Which
is a terrible example, but still so what
we have here is the distribution of ages in
Japan So this is the age on the y-axis, so 0
all the way up to 100 plus, and this is how
many people, men and female, in each segment
of this distribution. And what's really
interesting about Japan in particular,
but this is a common thread in
other places of the world, is that the
distribution is very weighted
towards older people. Most people in society
are above the age of 50, and the mean
average is quite high, actually. So the mean
age is quite high. so this means in Japan
there's going to be more demand for certain
type of goods that people from the 50 up
age prefer than from the people that are
you know younger and we have this thing at the
moment in the world a lot of people are
concerned about birth rates being lower than
replacement and if they're lower than
replacement and we continue going on in
general that means demands going to decrease and
shift down into the left so that's how
population can affect demand. Penultimately, we have
consumer expectations. So people are quite
smart most of the time. If they know or
they expect prices to change in the future,
they're going to change their purchasing
patterns today. So I've got some examples down
here. Let's say you need to buy yourself
a TV, but you know the Black Friday sales are
in one month's time. And everyone knows that
a lot of electronic goods are cheaper
on Black Friday. So you're not going
to buy the TV now, you're going to
hold off for a month so usually just
before these big sales and events which are
well known people's demand for certain
goods which will be on sale in the
future will decrease on the other hand it
can also increase so an example this is the
u.s used to have a electric vehicle subsidy
so if you bought an electric vehicle you'd
get seven thousand five hundred dollar subsidy
and this was repealed in september 30 last
year so in september if people were
considering by an electric vehicle they wouldn't hold
that off to the future that would change
until now so even if their old car still had
a couple of years on it they might want to
take advantage of their subsidy as a result
demand for electric vehicles would have
increased because of that. Finally, well not
finally, I guess the price of bananas in climates
where hurricanes and floods happen if
you like bananas in your smoothies like me and
you know the primary source of bananas
comes from you know a certain demographic in
you know the u.s or in australia i'm referring
to australia more here where cyclones
can hit and if they do there's a shortage of
bananas in six months i usually like to buy a
large stock of it if i see that there's
you know these weather reports swirling about
the near future so i can freeze them and use
them in my smoothies in the future so people
with foresight will buy things today if they
get this information and a final example
of that is um my understanding is um
during COVID there was a toilet paper shortage
here as well is that correct there was a big
thing back home and I know you know some
people that were on the forums and blogs in
December 2019 and saw like these cases starting
in in in Wuhan and as a result like
there is some chance a pandemic will happen
these are the things that are happening in a
pandemic so they went out and they bought all
these things in December in 2019 a few months
before anything happened so they changed
their purchasing behavior based on expectations
of what's going to happen in the market
potentially in a few months so consumer
expectations matter a lot and even in the sense
of what we saw the toilet paper these bank
runs that can happen this is what it was
was a bank run people thinks everyone else
is going to buy up the toilet paper so I can't
wait I need to buy it all up now and it
just spirals out of control the same thing
happened with FTX if any of you follow finances
at all everyone try to withdraw their money
at the same time and this is what the the
Nobel Prize when it was an econ won it for
a few years ago showing how banks like central
banks can go bankrupt for this reason
finally they have this you know definition
of everything else so there are other reasons
outside of these main ones that can can affect
you know demand so sometimes you'll hear
that there's you know product that's on
the shelves that is actually unsafe for one
reason or another there's a fault as a result
these you know scares whether they're health
scares or fail-safe scares or anything,
they're going to reduce demand in that product
until it's, you know, fixed, essentially.
They also say the birth of a baby affects
the demand of diapers. I'd argue that would
go under population. I think that's clearly
a population effect. Also, there are, like,
you know, special events that can happen.
So I've noticed, you know, walking around
campus the past six months, a lot of people back
in the summer would wear these, you know,
Final Four Purdue t -shirts from when they
made the the final four of March Madness two
years ago now was it yeah so if Purdue were
to make the national championship this year
you can definitely see an increase in demand for
these type of specialty shirts so that's
an event that could happen that affects
demand so our old you know demand function was
just demand is equal sorry the quantity demanded
is just equal to the inverse of the price
of the product but now we're extending this
model to include a few other important
things so the quantity demanded of good X is
some function which just means is influenced in
some way by still the price of that own product
X but also the price of other goods why
and we say perhaps an index of other goods
because it could be many complements many
substitutes that's just the way to say that it's
influenced by people's income and H is just
all these other things that we talked about
that could influence demand. So a
simple but useful representation of a
demand function is this linear demand function
where each alpha in front of the
variable of interest just tells us how
a change in that variable affects
demand. So this is just still the quantity
demanded in general, alpha zero is
our intercept, alpha x here shows
us what happens when the price of the
good increases and we know by the law
of demand this is going to be a negative
number because demand will decrease
as price increases. PY, once again the price
of the related good Y, whether alpha is
positive or negative is going to depend
on if this good we're looking at is a substitute
or a complement. Finally the alpha M in
front of income will be positive or negative
depending on if this good is a normal
good or an inferior good and you don't
really need to worry so much about the sign in
front of h so as you can see here this is
going to be negative by the law of demand
as price of the good increases it's going to
decrease the quantity demanded if py is a
substitute alpha y is going to be positive
because as the price of the substitute
increases this product looks relatively a lot
Remember, as Pepsi, the price increases,
more people are going to want to demand Coke.
So it's going to be positive if PY is a
substitute, and it's going to be negative
if PY is a complement. This can sometimes
trip people up. It can be a little counterintuitive, so
keep that in mind. And alpha M will be
positive if X is a normal good, and it will be
negative if X is an inferior good. So as
income increases, you'll demand less of the
good if it's inferior. so we have some demand
function here you can see it's 12,000
minus 3 times px plus 4 py minus 1 plus
2ax so how much many of good x will
consumers purchase when we have all these
values and our goods x and y substitutes or
complements is good x a normal or an
inferior good so let's start here at py do
we think that py or good y is a substitute
or a complement Hands up if you think
it's a substitute. Hands up if you think
it's a compliment. Okay, so mix and a lot of people aren't sure. Remember, this seems a bit counterintuitive. If it's a positive
sign in front, it means good Y
is a substitute. Because what we're
looking at is what happens when PY, the price
of good Y, increases. So as it increases,
more people are going to want to
switch away from good Y to good X, which
is what we're interested in here.
so quantity increases. If PY or good Y was
a complement, if the price of the complement
became higher, less people would buy
the complement which means less people
would buy product X because they don't need
it to complement good Y as much because
they're not buying good Y. So that's when
it will be negative. How about with
income here? Based on the number
in front, minus 1, do we think
that this good is a normal good or an
inferior good? Hands up if you think
it's a normal good? Hands up if you think
it's an inferior good. Okay, most of you.
Yes, it's an inferior good. So, as income
increases, what's going to happen to the
quantity demanded? Based on this, it's going to
decrease, and we know by definition an
inferior good is a good whose demand decreases
as income increases. And you can get the
quantity demanded, or the how much of good
X people want to purchase, literally
just by plugging in these numbers. So,
you put in 200 for PX, 15 for PY, 10,000 for
M, 2,000 for A, just add it all up and
you get 5,560 units. So the last thing I
want to say about this is, once again, we can
kind of use calculus to get an understanding
of how the quantity will change if one of
these terms changes. So here, as you can
see, if the price of our good increases
by 1, we can use calculus to see what
will happen. So Px is to the power of 1,
because it's linear. If we take the derivative
of the quantity demanded by the price
of x, we take the 1 out the front, times
minus 3 by 1, and reduce the power of Px
from 1 to 0. So this disappears, we end up with
minus 3. And this just tells us if the price
of good x increases by $1, or one unit,
whatever we're using, the quantity demanded
will decrease by 3. same thing with PY here
we can do the exact same thing take the 1
out the front, 1 times 4 is 4 the PY goes
from PY to the power of 1 to PY to the power
of 0 it disappears and we can see that if
the price of Y increases by 1 then the quantity
demanded of good X will increase by 4
and it's the same thing we can do with income
as well we're just repeating the same
process so this little equation can tell us a
lot in isolation what's going to happen with
one of our you know parameters of interest
increases or decreases and finally this thing
is the exact same as before except now
we don't know what px is and when we add
everything up we just get the quantity demanded
equals 6060 minus 3 px and the way we
graph it p is on the y -axis price so that's
our dependent variable so we want to rearrange
in terms of p we take the 6060 across the
other side and divide everything by minus
3 and that's how we get px equals 2020
minus 1 3 q dx and this is our inverse demand
function and we draw this to make we use
this to draw the demand curve here so as you
can see when q equals 0 the price is going
to be 2020 that's represented here and when
the price is 0 we know the quantity is 6060
and we just saw a straight line between
between these two points, and that is our inverse
demand function. Okay, so consumer
surplus is simply the value someone gets from
a good, which is how much they would be
willing to pay for it minus what they actually
pay. So the value consumers get from a
good that they don't have to pay for
would be the maximum consumer surplus someone
can get from a good. So think about our
coffee example. We know that Michael's willingness
to pay was, what was it, Michael, $11
in the end? I can't remember. So if I offered
the service for $12, Michael would say no. If I offered him for
$5, he'd say yes, because if you paid
$5 but valued it at $11, then he'd
be making a consumer surplus of $11 minus
$5, which is $6. So what is your
marginal benefit from having a six slice of
pizza? if you value it at two dollars you
would not be willing to pay more than two
dollars for it you'd be willing to pay two
dollars or less so let's say it was cost
50 cents you would buy it and your surplus
would be what you would be willing to
pay maximum for which is two dollars
minus the amount you actually paid for 50
cents which is 1.5 dollars so i always want
you to think about consumer surplus about
each individual's maximum willingness to
pay for a good minus what they actually pay
and then what we do is we just aggregate
all that together. So I can show
you this for an individual with
coffee. Let's say coffee always
costs two dollars. For your first cup
of coffee let's say you get ten dollars
of benefit from it so you'd be willing to
pay up to ten dollars for it. That means
your consumer surplus for this first
cup would be ten minus what you pay two
which equals eight. For your second cup
you still get a lot of benefit from it but
less so than the first one. This diminishing
utility starts to take effect so you say I
get seven dollars of benefit I'd be willing
to pay up to seven it still costs two dollars
so you get seven minus two which equals
five dollars consumer surplus all the way to
the fourth cup where you derive two dollars
and one cent benefit from it it costs two
dollars so by buying it you get benefit or the
consumer surplus of one cent and the assumption
here is the fifth copy fifth cup of
coffee will be below so you stop buying it for
so we know this person is going to buy four
units of coffee at the price of two dollars
and we can do that for every person that
exists and we can use that to figure out what
the demand curve is at any point and how
much surplus people are getting based on
that so as you can see here at some price X
here the consumer surplus in terms of the
graphical representation is the area above the
price and under the demand curve but the
way to think about it here is let's say at this
point here so at four dollars that means
someone values this at four dollars so
Michael's like I will pay four dollars for this
coffee I get four dollars of value but the price
is only two dollars so he's getting that
much value from it he's getting two dollars
of consumer surplus whereas someone here
might value it at like two dollars and one
cent they're still getting a little bit of
surplus the person here who values it at two
dollars is getting zero surplus so there's
nothing under that point here and someone
might value it at one dollar they're not
going to buy it because the price is two dollars
so that's why there's nothing going on here
for the consumer all the surplus takes
place in terms of how much value people get
out of the good which takes place in this area
here everyone following along any questions
on consumer surplus okay great so we're
going to finish off with speaking about supply
and then deriving our own supply curve as
well so what supply is is the maximum quantity
a seller is willing and able to sell at
various prices once again we can represent it
as a table of data a graph or an equation
and the market supply curve is a curve indicating
the total quantity of a good that all
producers in a competitive market would produce
at each price holding import prices of
technology and other variables like labour
prices as well constant and our law of supply is
as the price of a good rises the quantity
supplied of the good rises holding other
factors affecting supply constant and this is
simply because sellers can make more profit
as the prices rise so they're willing to produce
more goods at higher cost because they can
make a profit that's why the law of supply
exists in that way as you can see we have this
positive relationship between quantity and
price this is what our supply curve looks
like but why look at a graph when we can
create one ourselves so last class we created
our demand curve by me asking how much would
you be willing to pay me to do a service and
buy a product for you and in this class i'm
offering to pay you money to do something
for me and i needed to think of something that
you know people probably you know wouldn't want
to do so they need to do it for money in
previous classes you know sometimes I get
people up the front to sing karaoke I don't
really want to listen to anyone sing today
so I'm going to lean into the Australian bit
how much would I have to pay you to in front
of the whole class have some Vegemite so
Vegemite has anyone here had Vegemite before
what's your review of Vegemite horrible okay
great that's exactly what I wanted to hear
so Vegemite is a very Australian spread it's
as you can see yeast extract it's originally
made from the leftovers of beer and it's a
staple in Australia. In fact, if anyone knows
the song Land Down Under, so like I come
from a land down under, there's a line in
here that says he just smiled and gave me a
Vegemite sandwich. So it's embedded in our culture
and here are the ingredients here. I
don't want anyone to participate if you're
allergic to anything here. I'll get in a lot of
trouble. So what I'm going to do is I'm
going to get you all to stand up and I'm
going to offer you to come up here and eat
Vegemite on a Ritz cracker for that amount
of money if you're not willing to do
it that amount of money then you sit
down so let me get this up we're gonna we're
gonna do this all over again so let's get
the Excel up so stand up if you'd be willing
to eat Vegemite on a cracker for $100
I'll pay you $100 is anyone already out
are you already out like really you wouldn't
do for $100 right now okay great that's
a man who knows how much he's willing
to accept for a task so what are we let's
say we're at $39. $50. Let's
half the price. Will you do this for $50? Have we lost
anyone? Everyone's still standing up. Great. $25. This is very salty,
by the way. A real quiet taste.
First time's not fun for anyone. Everyone's
still standing. We haven't lost
anyone. Great. $10. For $10.
Is anyone out? Okay. We've lost
three, four. Yeah, okay, great.
Let's say we're down 32 now five dollars let's
half it again five dollars we've lost
quite a few more people so what we're probably
at like let's say 20 now 2.5 dollars
2.5 dollars not even enough to get a
copy okay how many are we down to i can
probably count it one two three four five
six seven eight nine ten twelve
thirteen fourteen one point five dollars is
that anyone's breaking point What was
your, what was the lowest you were willing
to go by the way? Um, I'd say one,
but I feel like we were just
going to keep going. Fair enough,
fair enough. So now we're down
to, let's say, $11. $1. Okay, we lost three. 50 cents. We lost two
more. One, two, three, four,
five, six, seven. Just say six
for posterity. 10 cents. Anyone
out for 10 cents? Okay, so you'd
all be willing to do it for 10 cents? Are you out back
there as well? So one, two, three, four,
we've got five left. Who would be willing
to do it for nothing? Okay, great, this is
perfect. So we're going to illustrate something
else here, but first I want to show
you, before we get to this, our beautiful
supply curve, which is not the, this looks like
an exponential curve, actually, but this
is what the law of supply is. At the highest
price, 100, pretty much everyone was
willing to do it, but as we reduced the price,
less and less people were willing to do
it. You're not selling a product but labor
functions in the same way. You're selling your
labor essentially So you're willing to do
it for more and more money So the higher
the price the more willing you are to do
things the lower the price the less you are
willing to do things Now we're going to move
beyond supply and demand here because
sometimes people have weird preferences They want
to do things even if they're not getting
paid so volunteering Internships are great
examples and some internships people
actually pay to do as well So now what I'm
going to do is reverse this on you, so you're
willing to do it for nothing How much
would you pay me to eat the Vegemite right
now, we have five of you Would anyone who
pay me ten cents right now to eat the
Vegemite, sit down if you're out Pay me ten
cents for the Vegemite, you two, you'd pay
ten cents right now One dollar, would
both of you still be standing, would that
knock any of you out? Two and a half
dollars, you pay me two and a half
dollars to try the Vegemite How much
does Vegemite cost? Well, you're not
paying the whole job, but it's costing
$15 in America. It's like $3 back
home, though. Okay, what's the most
you'd be willing to pay me to try right
now? Probably like $5. And? Like $4. Okay, $5's the
winner. Okay, what's your name, sorry?
I'm Zach. Zach, you can give me
$5 after this. If you're
willing, and here, you can lather
it up yourself. Oh, where's my Ritz? I don't know. It's out. Oh, it's out, okay. So, Zach, yeah?
Come up here. I don't know
how to order. Nothing if not amount
of my word. Nothing if not amount of my
word. Fair enough, fair enough. You said $5.
I mean, I'm a man of my word. When I say I'm
going to do something in class, I'll do
it. And there'll be some time in the next
week where we're going to do an activity
where I'm going to pay you money, so I'm going
to stop taking money from you and I'll
start giving back. So, yeah. Oh, you can use the knife, not the spoon now. Also, be very
careful with how much you put on.
It is very strong. Actually, before
you even do, I want to have smell. It's very strong
in the smell. Oh, I'll have it come
around a bit. No, I'm just creating
that drama here. I saw you standing up
to like a blueberry. And come up to me
afterwards if you want to smell. I
can't really show you. Right now, we need
to get this done. But yeah, come
up afterwards, and I'm hanging
around, so yeah. Okay, Zach, so
get your rinse. There's a plate there
as well for you. You can go with me. You're spending
five bucks on the experience after
all. Oh, yeah, no. It's also a matter
of how much do I want to make myself
suffer from this. I mean, I eat this
every morning, by the way, so I love
it, but it's a really salty spread, so
it goes really well with cheese on top
or with avocado. So I usually like to have a toast with avocado. How do you feel? Tastes like food.
Tastes like food? It's not bad. Do you
regret spending five bucks on it? No, it's
worth the experience. Okay, nice. Well,
I'm glad. Well, thank you so much, Zach,
for showing us that people are actually
willing to pay to do things that others
wouldn't do if they're getting paid for. We
have our beautiful supply curve here.
Thanks for everyone. And that's all I
have today. I'll give you more
information about my homework, and I'll
see you all on Monday. If you want to come
smell some Vegemite, you're more than
welcome to it. I don't have
enough everywhere to taste, though,
unfortunately. Do you like it? I hate it. It's
all out of my way to have it, but
it was just... It really was. I asked. Yeah, you
won't. No, I'm out. When did you
sit down? Sorry? When did you sit
down? I've had another thing to bend or
fight. Dan, and you've had it before. You're
like, I like it. That's funny. I'm just curious. I've always heard that
it's terrible. It's not nearly as bad
as I was expecting it to be. Well, I
ate it every night. I love it. It's just
very acquired at times. I had a jar full
of that, and then I had one
bite, and then I didn't have
anything. Yeah. I had like a jar full
of, like, anything that it tastes like.
Well the thing is, people don't tell you
how much to put on. Yeah, yeah, yeah, yeah. And it's like, oh, no. It's not like you
don't want to do that. Of course you
can. Like it almost tastes like beef. Like just very
salty beef. I don't know if
I'd say everyday. It depends on how
healthy or unhealthy it is. I don't
want to smell it. It smells all
good. It does. It doesn't taste bad.
It just doesn't... Of course. It's not bad, though. Because I've got some
time. Like, if anyone wants to smell it,
just don't leave it out here. Do what
you want to do. Just don't hate it, because
it's unfair on Zach. Um, yeah, so... I was speaking
with... Do you know Dr. Camaro, a little
bit of a chance? I was speaking with
her, and she was like, oh yeah, I don't
want some people to see it as unfair. and
at the end of the day I want you to do
this project, and I think it's cool, but
I just feel like I'm a little bit nervous
because a lot of people don't like the
exam, and they'll be like, oh, why can't I
do a project as well? And at the end of
the day it's meant to be hard, but at the
same time if you're sick on one of the
exams, that's why the drop exists, so I
might just go back to saying what we originally
agreed on, if that's cool with you. I
see, I don't really care that much about
exams, like... Okay, yeah, yeah, so let's
just do what we originally agreed
upon. you still have the dropper and
yeah I'll just um I'll set the criteria
for it and yeah no worries all
good good thank you hey how's it going yeah yes unfortunately
that's the way they do it I'm kind of upset
by that because I committed to all of
that before knowing they make you buy the textbook
which I think kind of sucks but yeah I'm
all set up now So, yeah, I apologize,
but, yeah, thank you. All right, see ya. Michael, what's
up? I owe you $11. You do owe me $11. That first thought
was really good. Yeah? Yeah. Great, so do you have
Zelle on your chair? Yes, I just set up an
account. OK, amazing. Let me, I gotta figure
out what my Zelle is. I never used it before. Oh, good. I'm really
enjoying class. I'm glad to hear that. As I said, this
class can be very hit or miss in terms
of the content. But, yeah, I'm
just trying to make it as relatable
as possible. Did you like
the um, Nathan, for Euclid? Yes,
that was it. Oh, it's one of
my favourites. Okay. How do I find myself? It says, send
request to split or scan a code or
something. Manage Zelle recipients,
Zelle settings. Okay. Yeah, so my ID, if you send
Zelle, and you can put an email in,
I think. Yes. So, my email
is just n.gmail .com, and then,
like, it usually tells you like
it's recognized Is it E? G-R-O-D-E Good choice when
getting the hot drinks I had someone put it
in ice and I'm like oh my god I didn't
want to carry an ice So I put your name Yeah
so just being great And you should
recognize me Yeah it's just
in full of things Oh there we go