ch15lec - ECON 306 Chapter 15 Market Demand RUST CHO DIAZ...

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ECON 306 Chapter 15: Market Demand RUST, CHO, DIAZ
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Individual Demand and Market Demand x Assume that n consumers inhabit the economy. x For each consumer “ i ” we represent the individual demand for good 1 as ) , , ( 2 1 1 i i m p p x and that for good 2 as ) , , ( 2 1 2 i i m p p x . Recall that these expressions represent the quantity each consumer wants to purchase of both goods for given prices and income. x The market demand (or aggregate demand ) for a good is the sum of individual quantities overall consumers. x For good 1 the market demand is: ¦ n i i i n m p p x m m p p X 1 2 1 1 1 2 1 1 ) , , ( ) ,..., , , ( . x For good 2 the market demand is: ¦ n i i i n m p p x m m p p X 1 2 1 2 1 2 1 2 ) , , ( ) ,..., , , ( . x Notice that the market demand depends on the income distribution across consumers. x In general we cannot express market demand as a function of aggregate income. x However we can assume that there exists a representative consumer whose income is the sum of all individual incomes ¦ n i i m M 1 and then the market demand can be expressed as ) , , ( 2 1 1 M p p X .
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15.01
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Individual Demand and Market Demand (cont.) x Suppose that there are only two consumers in the economy. Consumer 1 has an individual demand for good 1 given by 1 1 2 1 1 1 20 ) , , ( p m p p x ± while consumer 2 has an individual demand given by 1 1 2 1 1 2 2 10 ) , , ( p m p p x ± . x Notice that for prices above $20 nobody want to consume the good, for prices between $20 and $5 only consumer 1 wants a positive amount of the good (consumer 2 demand is zero for prices above $5), and for prices below $5 both consumers demand a positive amount of the good.
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This note was uploaded on 10/25/2011 for the course ECON 326 taught by Professor Hulten during the Spring '08 term at Maryland.

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ch15lec - ECON 306 Chapter 15 Market Demand RUST CHO DIAZ...

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