Class 6s - Department of Economics LeBow College of...

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Department of Economics Fall 2009 LeBow College of Business Microeconomics 301 Drexel University Professor Stehr Class 6 Outline 1. Market Demand 2. Consumer and Producer Surplus 3. Network Effects Market Demand : Identical individuals Suppose we have five individuals with identical demand given by the equation P = 100 – 2q i Find the equation for market demand and graph both individual and market demand. The new demand curve has the same Y-axis intercept but a slope that is 5 times flatter. Compare the elasticity of individual demand with that of market demand at a price of 50. Market demand is no more elastic! 1
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Market Demand : Heterogeneous individuals Now suppose that we have two types of individuals with different demand equations, students and professionals. Q stud = 120 – P if P <= 120, Q stud = 0 if P > 120 Q prof = 120 – 0.5P if P <= 240, Q prof = 0 if P > 240 Add the equations to get the total demand but recall that students do not buy any tickets if the price rises above 120. Graph the three demand functions. 2
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Consumer and Producer Surplus We need a way to measure the benefits that consumers derive from markets Consumer surplus— Demand curve is a maximum marginal willingness to pay curve because it tells us the maximum consumers are willing to pay for each additional unit produced. The chart below summarized a consumer’s demand for smoothies. If P = 5, what is his CS? smoothies mwtp price CS 1st 15 5 2nd 11 5 3rd 8 5 4th 6 5 5th 5 5 3
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Consumer (and producer) surplus can be calculated for individuals or for the market as a whole. Suppose the chart below describes the maximum amount that various buyers are willing to pay for a used copy of a chemistry textbook. Textbooks mwtp Price CS 1st 30 20 2nd 26 20 3rd 23 20 4th 21 20 5th 20 20 Producer surplus-- Marginal cost—the additional cost of producing one more unit of a good Consumer and producer surpluses can be calculated for individuals or for the market as a whole. The chart below describes the minimum amount that various sellers are willing to accept for used copies of their chemistry textbook. Find the producer surplus if the price is $20.
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