Econ 101 Demand Notes: MV, TV, TE, CS, Demand Curve, Market Demand, and Shifts

Overview: Individuals have preferences and make choices that aggregate into market demand, which can be modeled to understand buying decisions, valuation, and market dynamics.

1) Key Concepts and Definitions

  • Value (willingness to pay): What a person gives up for a good; can vary per unit.

  • Total Value (TV): Sum of marginal values for all units consumed.

  • Marginal Value (MV): Benefit from the next unit; tends to diminish with increased consumption.

  • Total Expenditure (TE): Actual money spent; TE = P * Q

  • Consumer Surplus (CS): Net benefit; TV minus TE, or the area between the MV/demand curve and the price line for units purchased. CS = TV - TE

  • Demand Schedule: Table showing quantity an individual buys at various prices.

  • Demand Curve: Graphical representation of the demand schedule (price on vertical, quantity on horizontal axis); typically downward-sloping.

  • Market Demand: Horizontal sum of individual demand curves.

  • Change in Quantity Demanded: Movement along the demand curve due to price change.

  • Change in Demand: Shift of the entire demand curve due to non-price factors.

2) The Demand Schedule and the Demand Curve

  • Demand Schedule: Illustrates that as price falls, quantity demanded increases.

    • Example pattern (numbers illustrative): price levels (6, 5, 4, 3, 2, 1, 0) with corresponding quantities (0, 1, 2, 3, 4, 5, 6) in a simplified pedagogical example; small, discrete numbers are used for clarity.

  • Demand Curve: A downward-sloping line plotting price (P) against quantity (Q).

3) Valuation Concepts: TV, MV, TE, CS

  • Marginal Value (MV): The value of the incremental unit. The height of the MV/demand curve at quantity Q equals MV_Q.

    • Example connection: If MV1 = 6 and MV2 = 4, then the price that makes the consumer buy 2 units is the level where MV2 >= P, but MV3 < P.

  • Total Value (TV): TV(Q) = Sum of MVi for i=1 to Q

  • Total Expenditure (TE): TE(Q) = P * Q

  • Consumer Surplus (CS): CS(Q) = TV(Q) - TE(Q)

  • Geometric Interpretation: TV is area under MV curve; TE is a rectangle under the price line; CS is the area between the MV curve and price line.

4) How to derive the Demand Curve from a Marginal Value Schedule

  • Consumers buy units as long as their marginal value for that unit is greater than or equal to the price (MV_k >= P). The demand curve is essentially the marginal value curve.

  • Diminishing marginal value drives the downward slope of demand.

5) From Individual to Market Demand

  • Market demand is the horizontal sum of individual demand curves at each price, remaining downward-sloping.

  • Shifts occur due to non-price factors; movements occur due to price changes.

6) The Law of Demand and Why It Holds

  • Law of Demand: Price and quantity demanded are inversely related (P falls, Q rises; P rises, Q falls), due to diminishing marginal value.

7) Expenditure, Value, and Consumer Surplus — Worked Examples

  • Example 1 (MV schedule with MV1 = 6, MV2 = 5, MV3 = 4, MV4 = 3, MV5 = 2, MV6 = 1, MV7 = 0):

    • If price P = 5, the consumer buys Q = 2 units (since MV2 >= 5 but MV3 < 5).

    • TV(2) = MV1 + MV2 = 6 + 5 = 11.

    • TE(2) = 5 * 2 = 10.

    • CS(2) = TV - TE = 11 - 10 = 1.

  • Example 2 (Ebay auction): one unit, MV = 100, price paid = 60.

    • TV = 100, TE = 60, CS = 40.

  • Example 3 (Movie): willing to pay 15, ticket price = 7.

    • TV = 15, TE = 7, CS = 8.

8) The Cost-Benefit Buying Rule

  • Consumers buy additional units as long as MVnew >= P, stopping when MV{Q+1} < P. This means buying up to the quantity where MV_Q = P.

9) Shifts in Demand: What Moves the Curve?

Demand shifts due to non-price factors:

  1. Price of related goods:

    • Complements: Higher (lower) complement price reduces (increases) demand.

      • Examples: peanut butter and jelly; gas and cars; pencils and paper.

    • Substitutes: Higher (lower) substitute price increases (reduces) demand.

      • Examples: Coke and Pepsi; butter and margarine; brand-name vs off-brand.

  2. Income:

    • Normal goods: Demand increases with income.

    • Inferior goods: Demand decreases with income.

      • Examples: off-brand cereal, instant noodles (typical inferior examples); high-income consumers may shift to higher-quality goods.

  3. Number of buyers: More (fewer) buyers increase (decrease) demand.

  4. Information and tastes: Advertising or health information can shift demand.

  5. Expectations: Expecting future higher (lower) prices shifts current demand right (left).

12) Reading and Using the Graphs: Practical Insights

  • Quantity Demanded: A specific point on the curve.

  • Demand: The entire curve (relationship between price and quantity).

  • A shift in demand changes the MV schedule; a movement along demand is due to price change.

14) Summary Takeaways

  • The demand curve is the MV curve, showing willingness to pay for each unit.

  • TV, TE, and CS quantify value, cost, and net benefit.

  • Market demand sums individual demands.

  • The law of demand stems from diminishing MV.

  • Shifts in demand are caused by non-price factors (income, related goods, buyers, information, expectations); movements by price changes.

15) Quick Reference Formulas

  • TV(Q) = Sum of MVi for i=1 to Q

  • TE(Q) = P * Q

  • CS(Q) = TV(Q) - TE(Q)

  • Demand curve (D) is the marginal value curve; its height at quantity Q equals MV_Q

  • Market Demand: QMarket(P) = Sum of Qi(P) for all individuals

  • Consumption rule: continue buying while MVn >= P; stop when MV{n+1} < P, or at MV_Q* = P