lecture07 - MARKET DEMAND Overview 1 Constructing market...

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MARKET DEMAND Overview 1. Constructing market demand from individual demands 2. Measurement of consumer surplus 3. Complications caused by positive and negative externalities
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MARKET DEMAND The “market” (or “aggregate”) demand function measures the demand of all consumers for a specific product. Market demand is obtained by adding the quantities demanded by all individuals (or “segments” of consumers) at each price and plotting this total quantity for all possible prices. Assumptions: All consumers face the same price for the good in question, as well as the same prices of all other goods. Consumer income will vary in general but are invariant with respect to prices. Individual demand for the good is independent of its consumption by all other individuals. In particular, there are no consumption externalities.
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Σ h D h (p X ; p Y , I h ) where consumers/households indexed by h=1,…,N HORIZONTAL SUMMATION Sum the quantity demanded by all consumers at each possible price of the good (p X ), given their income ( I h ) and all other prices (p Y ):
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lecture07 - MARKET DEMAND Overview 1 Constructing market...

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