chapter15 - Intermediate Micro II Instructor: Prof Berta...

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Econ 2350M Winter 2009 1 Intermediate Micro II Instructor: Prof Berta Esteve-Volart Department of Economics, York University Chapter 15 – Market Demand Note: Only for students of Econ 2350M
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Econ 2350M Winter 2009 2 From Individual to Market Demand • Aggregate demand for good 1: = n i i n m p p x m m p p X 1 2 1 1 1 2 1 1 ) , , ( ) ,..., , , (
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Econ 2350M Winter 2009 3
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Econ 2350M Winter 2009 4 • For a given price, we sum individuals’ quantities demanded - graphically:
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Econ 2350M Winter 2009 5 • Discrete good:
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Econ 2350M Winter 2009 6 Elasticity • How responsive is demand to changes in price or income? If p increases, by how much does q decrease? Quantity Price q p
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Econ 2350M Winter 2009 7 • Slope of a function y of x is y/ x •S o q/ p could be a candidate • Problem: it depends on units! • Need a measure that takes units into account Æ relative measure: That is, %change in q/%change in p p q q p p p q q Δ Δ = Δ Δ = / / ε
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Econ 2350M Winter 2009 8 • Notice ε negative, because demand generally downward sloping: when price increases, demand falls • Convention: from now on, take the absolute value • A higher | ε | means demand is more elastic: for a given change in price, quantity demanded responds more
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Econ 2350M Winter 2009 9 • Imagine p changes by 1%: then we say - If q changes by more than 1% (| ε |>1), then demand elastic - If q changes by less than 1% (| ε |<1), then demand inelastic - If q changes by exactly 1% (| ε |=1), then demand has unit elasticity
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Econ 2350M Winter 2009 10 • Elasticity of a linear demand curve : - Although slope is constant along demand curve, elasticity is not – because of the p/q term - If demand is , then Æ If p zero, ε =0 Æ If q zero, | ε | infinity bp a bp q bp = = ε bp a q =
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This note was uploaded on 01/26/2011 for the course ECON 1111 taught by Professor Fertar during the Spring '10 term at Memorial University.

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chapter15 - Intermediate Micro II Instructor: Prof Berta...

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