Chapter15 - Chapter 15 Market Demand 1 To get market demand...

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Chapter 15 - Market Demand 1. To get market demand, just add up individual demands. (a) add horizontally (b) properly account for zero demands (see figure 15.2. in the textbook) 2. Often think of market behaving like a single individual. (a) representative consumer model (b) not true in general, but reasonable assumption for this course 3. Inverse of aggregate demand curve measures the MRS for each individual. 4. Reservation price model (a) appropriate when one good comes in large discrete units (b) reservation price is price that just makes a person indifferent (c) defined by u (0 , m ) = u (1 , m - p * 1 ) (d) see figure 15.3. in the textbook (e) add up demand curves to get aggregate demand curve 5. Price Elasticity of Demand (a) measures responsiveness of demand to changes in price (b) ǫ = p q dq dp (c) example for linear demand curve for linear demand, q = a - bp , so ǫ = - bp/q = - bp/ ( a - bp ) note that ǫ = - 1 when we are halfway down the demand curve see figure 15.4. in the textbook suppose demand takes form q = Ap - b then elasticity is given by ǫ = - p q bAp - b - 1 = - bAp - b Ap - b = - b thus elasticity is constant along this demand curve
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