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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
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
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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