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Varian_Chapter15_Market_Demand

# Varian_Chapter15_Market_Demand - Chapter Fifteen Market...

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Chapter Fifteen Market Demand

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From Individual to Market Demand Functions ± Think of an economy containing n consumers, denoted by i = 1, … ,n. ± Consumer i’s ordinary demand function for commodity j is xp p m j ii * (, , ) 12
From Individual to Market Demand Functions ± When all consumers are price-takers, the market demand function for commodity j is ± If all consumers are identical then where M = nm. Xpp m m x pp m j n j ii i n (, , ,, ) , ) . * 12 1 1 L = = M n x m jj , ) , ) *

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From Individual to Market Demand Functions ± The market demand curve is the “horizontal sum” of the individual consumers’ demand curves. ± E.g. suppose there are only two consumers; i = A,B.
From Individual to Market Demand Functions p 1 p 1 x A 1 * x B 1 * 20 15 p 1 p 1 p 1 p 1

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From Individual to Market Demand Functions p 1 p 1 x A 1 * x B 1 * xx A B 11 * + p 1 20 15 p 1 p 1 p 1 p 1 p 1
From Individual to Market Demand Functions p 1 p 1 x A 1 * x B 1 * xx A B 11 * + p 1 20 15 p 1 p 1 p 1 p 1 p 1 p 1

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From Individual to Market Demand Functions p 1 p 1 x A 1 * x B 1 * xx A B 11 * + p 1 20 15 35 p 1 p 1 p 1 p 1 p 1 p 1 The “horizontal sum” of the demand curves of individuals A and B.
Elasticities ± Elasticity measures the “sensitivity” of one variable with respect to another. ± The elasticity of variable X with respect to variable Y is ε xy x y , % % . =

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Economic Applications of Elasticity ± Economists use elasticities to measure the sensitivity of z quantity demanded of commodity i with respect to the price of commodity i (own-price elasticity of demand) z demand for commodity i with respect to the price of commodity j (cross-price elasticity of demand).
Economic Applications of Elasticity z demand for commodity i with respect to income (income elasticity of demand) z quantity supplied of commodity i with respect to the price of commodity i (own-price elasticity of supply)

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Economic Applications of Elasticity z quantity supplied of commodity i with respect to the wage rate (elasticity of supply with respect to the price of labor) z and many, many others.
Own-Price Elasticity of Demand ± Q: Why not use a demand curve’s slope to measure the sensitivity of quantity demanded to a change in a commodity’s own price?

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Own-Price Elasticity of Demand X 1 * 55 0 10 10 slope = - 2 slope = - 0.2 p 1 p 1 In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ? X 1 *
Own-Price Elasticity of Demand 55 0 10 10 slope = - 2 slope = - 0.2 p 1 p 1 X 1 * X 1 * In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ?

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Own-Price Elasticity of Demand 55 0 10 10 slope = - 2 slope = - 0.2 p 1 p 1 10-packs Single Units X 1 * X 1 * In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ?
Own-Price Elasticity of Demand 55 0 10 10 slope = - 2 slope = - 0.2 p 1 p 1 10-packs Single Units X 1 * X 1 * In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ?

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Varian_Chapter15_Market_Demand - Chapter Fifteen Market...

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