Lecture 8 _Market Demand _ Elasticity_

Lecture 8 _Market Demand _ Elasticity_ - Market Demand...

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Market Demand & Elasticity (Lecture 8) Market Demand Price Elasticity Other Elasticities Market Demand & Elasticity (Lecture 8) Varian (2010), Chapter 15 January 26, 2011 George Georgiou - Intermediate Microeconomics 1/25
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Market Demand & Elasticity (Lecture 8) Market Demand Price Elasticity Other Elasticities Outline Until today we have combined our beloved budget constraint and our preferences to construct a model of Individual Choice . Individual choice in turn led us to Individual Demand for a good. Today, we will move one step further. From individual demand, we will move to Market Demand for a good. George Georgiou - Intermediate Microeconomics 2/25
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Market Demand & Elasticity (Lecture 8) Market Demand Price Elasticity Other Elasticities Market Demand Informally, what we do to get the market demand is just horizontally sum individual demands . So, for a given price we sum, for example, what one person demands and what another person demands and get the demand of the market. George Georgiou - Intermediate Microeconomics 3/25
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Market Demand & Elasticity (Lecture 8) Market Demand Price Elasticity Other Elasticities Market Demand George Georgiou - Intermediate Microeconomics 4/25
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Market Demand & Elasticity (Lecture 8) Market Demand Price Elasticity Other Elasticities Market Demand Market Demand just sums up the individual demands for a specific good. If consumer i ’s demand for good 1 is given by x 1 i ( p 1 , p 2 , m i ) and for good 2 by x 1 i ( p 1 , p 2 , m i ) and we assume that there n consumers, then the aggregate or market demand for good 1 is: X 1 ( p 1 , p 2 , m 1 , ..., m n ) = n X i =1 = x 1 1 ( p 1 , p 2 , m i ) Additionally, if we assume that there is only one representative consumer that has as income the sum of the income of all the individual consumers, then we can write the market demand for good 1 as: X 1 ( p 1 , p 2 , M ) , where M is the sum of all individual incomes. George Georgiou - Intermediate Microeconomics 5/25
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Market Demand & Elasticity (Lecture 8) Market Demand Price Elasticity Other Elasticities Market Demand Therefore, if we hold the price of good 2 and income constant , and then play with the price of good 1, then we will normally observe a relationship between price of good 1 and quantity demanded that looks like the familiar downward sloping demand curve . George Georgiou - Intermediate Microeconomics 6/25
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Market Demand & Elasticity (Lecture 8) Market Demand Price Elasticity Other Elasticities A picture of the demand curve George Georgiou - Intermediate Microeconomics 7/25
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Market Demand & Elasticity (Lecture 8) Market Demand Price Elasticity Other Elasticities Kinds of Goods On the other hand, we know that if good 1 and good 2 are substitutes
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