08. Market Demand

08. Market Demand - Market Demand Professor John Diamond...

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Market Demand Professor John Diamond ECON 370: Microeconomic Theory Lecture 8
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2 Individual to Market Demand: Introduction Suppose we know individual consumer demands Need to aggregate to total demand Suppose economy contains n consumers, i = 1, … ,n and two goods, x 1 and x 2 Consumer i’s ordinary demand function for good j is x p p m j i i * ( , , ) 1 2
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3 If all consumers are identical then Suppose all consumers are price-takers Then market demand for good j is X p p m m x p p m j n j i i i n ( , , , , ) ( , , ) * 1 2 1 1 2 1 L = = X p p M n x p p m j j ( , , ) ( , , ) * 1 2 1 2 = Individual to Market Demand Functions where M = nm = aggregate income
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4 In general, individual demands differ Market demand curve is “horizontal sum” of individual consumers’ curves At each price, add up quantities demanded Example Assume two consumers: i = A,B Market Demand Functions
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5 p 1 x A 1 * 20 p 1 p 1 The “horizontal sum” of D-curves of A & B Market Demand: Adding D-Curve Graphs p 1 x B 1 * 15 p 1 p 1 x x A B 1 1 * p 1 35 p 1 p 1 + =
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6 Elasticities: Introduction Often want to measure responsiveness of one variable in response to changes in another Elasticity measures this “sensitivity” Elasticity of x w.r.t. p is defined as Note: Don’t use slope because depends on units Percentage changes are independent of units , / / xp dx x dp p =
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7 Some Economic Applications of Elasticity Own-price elasticity of demand -- quantity demanded of good i w.r.t. price of good i Cross-price elasticity of demand -- demand for good i w.r.t. price of good j Income elasticity of demand -- demand for good iw.r.t. income Own-price elasticity of supply -- quantity supplied of good i w.r.t price of good i Elasticity of supply w.r.t. price of labor -- quantity supplied of good i w.r.t. wage rate
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8 Arc and Point Elasticities Arc-elasticity measures finite response “average” elasticity computed by a mid-point formula ) ( ) ( ) ( 5 . 0
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This note was uploaded on 04/10/2010 for the course ECON 370 taught by Professor Diamond during the Spring '08 term at Rice.

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08. Market Demand - Market Demand Professor John Diamond...

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