(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 154

CHAPTER 4 • Individual and Market Demand 129

domestic demand because poorer countries that import U.S. wheat turn to
other grains and foodstuffs if wheat prices rise.3
To obtain the world demand for wheat, we set the left side of each demand
equation equal to the quantity of wheat (the variable on the horizontal axis).
We then add the right side of the equations, obtaining
QDD + QDE = (1430 - 55P ) + (1470 - 70P )
= 2900 - 125P
This generates the line segment EF in Figure 4.12.
At all prices above point C, however, there is no export demand, so that
world demand and domestic demand are identical. As a result, for all prices
above C, world demand is given by line segment AE. (If we were to add QDE for
prices above C, we would be incorrectly adding a negative export demand to
a positive domestic demand.) As the figure shows, the resulting total demand
for wheat, given by AEF, is kinked. The kink occurs at point E, the price level
above which there is no export demand.

Speculative Demand
So far in our treatment of demand, we have assumed that consumers are “rational,” in that they allocate their income among various goods and services to maximize their overall satisfaction. At times, however, the demands for some goods
are based not on the satisfaction one obtains from actually consuming the good,
but instead on the belief that the price of the good will rise. In that case, it might
be possible to profit by buying the good and then reselling it later at a higher
price. This speculative demand is partly to blame for the sharp increases in housing prices that occurred in the U.S., Europe, and China during the past decade.
Speculative demand is often (but as we will explain in Chapter 5, not always)
irrational. People see that the price of a good has been rising, and somehow
conclude that the price will therefore keep rising. But there is usually no rational

E XAMPLE 4 .4

• speculative demand

Demand driven not by the
direct benefits one obtains from
owning or consuming a good
but instead by an expectation
that the price of the good will
increase.

THE DEMAND FOR HOUSING

Housing is typically the most
important single expenditure in a
household’s budget—on average,
households spend 25 percent of
their income on housing. A family’s demand for housing depends
on the age and status of the
household making the purchasing
decision. One approach to the

housing demand is to relate the
number of rooms per house for
each household (the quantity
demanded) both to an estimate of
the price of an additional room in a
house and to the household’s family income. (Prices of rooms vary
because of differences in construction costs, including the price of

3
For a survey of statistical studies of demand and supply elasticities and an analysis of the U.S.
wheat market, see Larry Salathe and Sudchada Langley, “An Empirical Analysis of Alternative
Export Subsidy Programs for U.S. Wheat,” Agricultural Economics Research 38, No. 1 (Winter 1986).