AGEC 603. Derived Demand for Land. Based on consumer choice Utility theory and budget constraint

Transcription

1 AGEC 603 Derived Demand for Land Individual Demand Based on consumer choice Utility theory and budget constraint Utility theory Utility is the satisfaction one gets from consuming a good or service Budget constraint how much you have to spend Marginal Utility Change in utility derived from a change in consumption of a particular good holding other goods constant Law of Diminishing Marginal Utility - as consumption per unit of time increases, marginal utility decreases Examples M&Ms Texan Steak - Amarillo 1

2 Bundle of goods Bundles of goods Indifference / Isoutility Curves Bundle of goods B 1 Negative slope Nonintersecting Everywhere dense Convex to the origin B 2 L 1 L 2 Land units Consuming B 1 L 1 provides the same utility as consuming B 2 L 2 Indifference Curves M B Land Units Which bundle would you prefer bundle M or bundle B? The answer is that this we would be indifferent because they give us the same utility. The ultimate choice will depend on the prices of these two products. Indifference Curves Which bundle would you prefer more bundle C or bundle N? C N We would prefer bundle N over bundle C because it gives us more utility or satisfaction. The question is whether we can afford to buy bundle N! Land Units 2

3 Bundle of goods 1 Bundle of goods -1 Marginal Rate of Substitution The rate at which the consumer is willing to substitute one good for another and maintain a constant utility level bundle land MRS of land for bundle with utility constant Notice - rise over run = the slope for a specific segment for a nonlinear curves Marginal Rate of Substitution MRS land for bundle going from 2 to 3 land units _ bundle 1 1 land 1 1 Land Units This means the consumer is willing to give up 1 bundle unit in exchange for one land unit! Marginal Rate of Substitution MRS bundle for land going from 2 to 3 bundle units bundle land Land Units This means the consumer is willing to give up 2 land units for one additional unit of bundle of goods! 3

4 Bundle of goods Marginal Rate of Substitution bundle MU MRS land MU land bundle Why? Utility must be constant What you give up with one, you must gain with the other! Budget Constraint Represents the amount of income available for spending on the consumption bundles Example land / bundle budget P land x Q land + P bundle x Q bundle Budget where P land and P bundle represent the price of land and the bundle of goods while Q land and Q bunlde represent the quantities you purchase during the time period. Budget Constraint Graph Income = $200 Prices = $40 / unit bundle and $20 / unit land Apply all income to bundle Budget Constraint Apply all income to land Land 4

5 Bundle of goods 9 10 Bundle of goods 9 10 Bundle of goods 9 10 Bundle Price Decreases by 1/2 Bundle price decreases by 1/2 Original price budget constraint After price change budget constraint Apply all income to land Land Bundle Price Increases by 2 Original price budget constraint Bundle price decreases by 1/2 budget constraint Bundle price doubles budget constraint Land Land Price Changes Original price budget constraint Land price doubles Land price decreases by 1/ Land 5

6 Bundle of good Bundle of goods Steaks (lbs) consumed per week Income Changes Original Budget Line Budget Line at increased income Budget Line at ½ income Note: parallel shifts Dozen corn ears consumed per week Objective - Maximize Utility Indifference Curve below budget constraint Can increase utility by moving outward Not Optimal Point Indifference Curve is Tangent to Budget Constraint Feasible spends all budget Maximizes Utility highest curve obtainable Land Units Indifference Curves and points above the budget Constraint exceeds your budget - not feasible Slope Budget Constraint Using x and y intercept points to calculate slope land = 0, bundle = 5 and land = 10 and bundle = 0 Slope = rise / run = (5-0)/(0-10) = -0.5 These points obtained Income / price of bundle = 5 and Income / price of land = 10 I I ( 0) Pbunlde P I I (0 ) Pland Pland Land Units bundle P P land bundle 6

7 Bundle of goods Tangency Conditions Slope of indifference curve = slope of budget constraint Slope of indifference curve = MRS = - MU land / MU bundle Slope of budget constraint = -P land / P bundle Therefore, MU MRS MU MU P land land MU P land bundle bundle bundle P P land bundle Consumer Equilibrium Point where utility is maximized subject to the budget constraint occurs at MU land P land = MU bundle P bundle In other words, the marginal utility derived from the last dollar spent on each good is identical. This can be expanded to include all goods and services purchased by the consumer. Individual Demand Curve Original Price = $20 / unit Consumption bundle 2.5 bundle units and 5 units land What if price decreases to $15? What happens to budget constraint? Land units 7

8 Bundle of goods Bundle of goods Land Price Decreases New x-intercept Same Why New equilibrium = 2.75 bundle and 6 land Why an increase in bundle and increase in land? Land Units Land Price Increases New y-intercept same Why? New equilibrium = bundle and 1.5 land Why an decrease in land and increase in bundle? Land Units Individual Demand Curve - Land Demand Schedule Price Quantity P increase 1.5 P o 5 P decrease 6 8

9 Market Demand Curve - Land + = The market demand curve is the horizontal summation of the demand schedules for all the consumers in the market. Demand Curve Jargon - Review Specific terms to distinguish between movement along a demand curve and a shift in a demand curve Change in the quantity demanded is a movement along a demand curve - Cause Change in demand is a shift in the demand curve - Causes World Population and Demand Population one of the most important factors in determining demand for land Trends Price Changing characteristics Future outlook P 3 Density P 2 S Increasing population leads to 1) increasing price and 2) increasing land use assuming no change in supply curve P 1 L 1 L 2 L 3 Land Quantity D 9

10 World Population Source: World Population Year Population Change 1 AD 200 million million billion Doubled in 313 years billion Doubled in 118 years billion Increased by 1 billion in 38 years billion Doubled in 39 years billion billion Source U.S. Census Bureau World Population Distribution 10

11 World Population by Country Urban Areas >= million inhabitants in World Population Density (people/km2) 11

12 World Population Growth Is Almost Entirely Concentrated in the World's Poorer Countries. World Population (in Billions): Source: United Nations Population Division, World Population Prospects, The 2008 Revision Population Reference Bureau. All rights reserved. 12

13 Population Density Projections Year Population Area (sq. km.) Density (persons per sq. km.) Acres / person ,557,628, ,061, ,042,828, ,061, ,712,338, ,061, ,450,929, ,061, ,287,869, ,061, ,090,319, ,061, ,866,054, ,061, ,631,071, ,061, ,315,758, ,061, ,896,844, ,061, ,376,416, ,061, Global Hunger Index The 2013 (GHI) ranks 88 countries using three indicators: The proportion of people who are calorie deficient, or undernourished The prevalence of underweight in children under the age of five The under-five mortality rate Takes into account the special vulnerability of children to nutritional deprivation Ratings from 0 (best) to 100 (worst). Global Hunger Index Countries are rated from 0 (best) to 100 (worst). Overall GHI scores improved from 18.7 in the 1990 to 15.2 in the Sub-Saharan Africa and South Asia have the worst scores on the 2008 GHI. Policy Research Institute, 13

14 2008 Global Hunger Index GHI-Winners and Losers Global Hunger Index Policy Research Institute, 14

15 U.S. Population U.S. Population 15

16 U.S. Population U.S. Population Components of Population Change One birth every 8 seconds One death every 12 seconds One international migrant (net) every 40 seconds Net gain of one person every 17 seconds 10 Most Populous States State Population, Pop. per sq. mi., Poplation California 38,332, ,444,861 Texas 26,448, ,317,744 New York 19,651, ,685,769 Florida 19,552, ,477,429 Illinois 12,882, ,432,892 Pennsylvania 12,773, ,768,184 Ohio 11,570, ,227,739 Georgia 9,992, ,712,397 Michigan 9,895, ,017,838 North Carolina 9,848, ,694,

17 Fastest Growing Cities Percent Increase 2011 Total Population 1. New Orleans , Round Rock, Texas , Austin, Texas , Plano, Texas , McKinney, Texas , Frisco, Texas , Denton, Texas , Denver , Cary, N.C , Raleigh, N.C , Alexandria, Va , Tampa, Fla , McAllen, Texas , Carrollton, Texas , Atlanta ,427 Fastest Growing States The 10 Fastest Growing States from April 1, 2010, to July 1, 2011 Percent change 1. District of Columbia Texas Utah Alaska Colorado North Dakota Washington Arizona Florida Georgia 1.32 The 10 States with the Largest Numeric Increase from April 1, 2010, to July 1, 2011 Numeric change 1. Texas 529, California 438, Florida 256, Georgia 128, North Carolina 121, Washington 105, Virginia 96, Arizona 90, Colorado 88, New York 87,000 U.S. Population Movement 17

18 U.S. Population Projections Table 1. Projections of the Population and Components of Change for the United States: 2015 to 2060 Year Population Numeric change Percent change Natural increase Births Vital events Deaths Net international migration ,363 2, ,677 4,290 2, ,896 2, ,612 4,380 2, ,407 2, ,453 4,413 2,959 1, ,471 2, ,225 4,433 3,208 1, ,662 2, ,002 4,505 3,503 1, ,016 2, ,612 3,765 1, ,934 1, ,729 3,951 1, ,803 1, ,820 4,038 1,204 thousands Interim Projections: Percent Change in Population by Region of the United States, 2000 to United States Northeast Midwest South West Source: U.S. Census Bureau, Population Division, Interim State Population Projections, 2005 Texas Population Projections Low zero migration High migration rate 18

19 Texas Population Projections Growth rates vary by year and area Changing Demographics Aging Population 19

20 Changing Race Make-up Changing Demographics Mean Commute travel times Year Minutes Back to Demand Theory How does above fit into our simple theoretical aggregated demand Changing demographic Aging usually lower disposable income Work at home lower travel expenses increase income to spend elsewhere Change in taste and preferences Change in indifference curve Only time will tell? 20

21 Land Price Bundle of goods Changing Income and Utility Max Increase in budget constraint move equilibrium Increase in income increase budget constraint Land Units Changing Income Increase in demand D new D original Land Units World GDP Increase - Projected 21

22 U.S. & Texas Income Non Ag Land Resource Needs Increasing Population mineral and energy needs increasing Urbanization Increased incomes increase demand for land Increased incomes increase in recreational / leisure activities All increasing demand for land Changing taste and preferences Competition between Land Uses Highest and best use Conflicts of interest arise Many land uses are not compatible with each other Owners have different objectives Conflicts of interest between owners and society 22