Chapter2

Chapter2 - Linear Demand Pro.t Maximisation Chapter 2...

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Chapter 2 Evrim Dener SMU (SMU) 1 / 37 Linear Demand Simple assumption: demand is a straight line: linear demand Inverse demand: P = a bq Ordinary demand: q = a b 1 b P Parameters: a , b (SMU) 2 / 37 Individual Demand ± Market Demand Individual demand: Tells what quantity an individual consumer would choose to purchase at each price Market demand: Tells what quantity all consumers combined would choose to purchase at each price To obtain market demand horizontally sum individual demands: add up quantities (SMU) 3 / 37 Example: N Identical Consumers (SMU) 4 / 37
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Marginal Consumer Marginal consumer: A consumer who is just indi/erent between buying and not buying the good at a certain price Price = Maximum willingness to pay of the marginal consumer. (SMU) 5 ± 37 Inverse Demand For each unit measures maximum price marginal consumer willing to pay. (SMU) 6 ± 37 Continuous Quantity Demanded In introductory microeconomics, typically assume that quantity demanded is a continuous variable Continuous variable: possible values In aggregate, often millions of units sold Reasonable to approximate as continuous (SMU) 7 ± 37 Example: Market Demand for Cars P = 300 . 000 & 0 . 0338 Q (SMU) 8 ± 37
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Discrete Quantity Demanded When considering some goods not reasonable to treat aggregate quantity as continuous Discrete variable: values (SMU) 9 / 37 Individual Demand For an individual consumer±s demand, often small number of units demand ²If so, NOT reasonable to approximate as continuous, must recognize as discrete (SMU) 10 / 37 Demand Elasticity Demand curve indicates quantity demanded at a given price How much demand changes as a result of price change? Measured by the slope of the demand curve
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Chapter2 - Linear Demand Pro.t Maximisation Chapter 2...

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