5 PPT_Aggregating_S_D

5 PPT_Aggregating_S_D - Q Algebra Algebra Aggregating...

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Aggregating Individual Demand and Supply How do we find market demand from individual demand curves? We will discuss the case in which goods are rivalrous in consumption. A good is rivalrous in consumption if what one person consumes cannot be consumed by someone else at the same time
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Examples of Rivalrous Goods: What are nonrivalrous goods ? We will discuss them later when we discuss public goods. Examples of nonrivalrous goods are:
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Examples with Identical Consumers
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2 Key Relationships for Rivalrous Goods •MSB = MB of individual who consumes the marginal good. •Market Demand: Q(P) = Q i (P)
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Back to example with identical consumers 5 people with demand schedules: Q i = 20 – P for 0 P 20 Thus, market demand is:
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Example with 2 Different Consumers Individual marginal benefit schedules: MB 1 = 20 – 2 Q for 0 Q 10 = 0 for Q > 10 2 = 30 – Q 30 = 0 for Q > 30
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Graphs of MBs MB MB Q Q
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Since we add the Q’s, we sum horizontally
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Unformatted text preview: Q Algebra Algebra Aggregating Supply Curves We obtain industry supply by summing individual firm supply curves horizontally. Suppose there are 10 firms, each with the following MC curve: MC = 5 + 2 Q i for i = 1,2,…,10. Individual Firm MC Curves MC Q i Algebra We know that each firm will produce up to the point where MC = P. Since all firms do this, MC is equalized across firms. Substituting P = MC in the equation and inverting yields each firm’s supply curve: Algebra Total supply by the industry (Q) is the sum of individual firm supplies: Q = Q 1 + Q 2 + … + Q 10 . Substitute the individual firm supplies into this equation to get: Industry Supply Curve P Q i 5 Note: Industry inverse supply curve is much flatter than individual firm supply curves....
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5 PPT_Aggregating_S_D - Q Algebra Algebra Aggregating...

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