Ch15 - Chapter Fifteen Market Demand From Individual to...

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Chapter Fifteen Market Demand

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From Individual to Market Demand Functions Think of an economy containing n consumers, denoted by i = 1, … ,n. Consumer i’s ordinary demand function for commodity j is x p p m j i i * ( , , ) 1 2
From Individual to Market Demand Functions When all consumers are price-takers, the market demand function for commodity j is If all consumers are identical then where M = nm. X p p m m x p p m j n j i i i n ( , , , , ) ( , , ). * 1 2 1 1 2 1 = = X p p M n x p p m j j ( , , ) ( , , ) * 1 2 1 2 = ×

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From Individual to Market Demand Functions The market demand curve is the “horizontal sum” of the individual consumers’ demand curves. E.g. suppose there are only two consumers; i = A,B.
From Individual to Market Demand Functions p 1 p 1 x A 1 * x B 1 * 20 15 p 1 p 1 p 1 p 1

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From Individual to Market Demand Functions p 1 p 1 x A 1 * x B 1 * x x A B 1 1 * + p 1 20 15 p 1 p 1 p 1 p 1 p 1
From Individual to Market Demand Functions p 1 p 1 x A 1 * x B 1 * x x A B 1 1 * + p 1 20 15 p 1 p 1 p 1 p 1 p 1 p 1

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From Individual to Market Demand Functions p 1 p 1 x A 1 * x B 1 * x x A B 1 1 * + p 1 20 15 35 p 1 p 1 p 1 p 1 p 1 p 1 The “horizontal sum” of the demand curves of individuals A and B.
Elasticities Elasticity measures the “sensitivity” of one variable with respect to another. The elasticity of variable X with respect to variable Y is ε x y x y , % % . =

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Economic Applications of Elasticity Economists use elasticities to measure the sensitivity of quantity demanded of commodity i with respect to the price of commodity i (own-price elasticity of demand) demand for commodity i with respect to the price of commodity j (cross-price elasticity of demand).
Economic Applications of Elasticity demand for commodity i with respect to income (income elasticity of demand) quantity supplied of commodity i with respect to the price of commodity i (own-price elasticity of supply)

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Economic Applications of Elasticity quantity supplied of commodity i with respect to the wage rate (elasticity of supply with respect to the price of labor) and many, many others.
Own-Price Elasticity of Demand Q: Why not use a demand curve’s slope to measure the sensitivity of quantity demanded to a change in a commodity’s own price?

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Own-Price Elasticity of Demand X 1 * 5 50 10 10 slope = - 2 slope = - 0.2 p 1 p 1 In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ? X 1 *
Own-Price Elasticity of Demand 5 50 10 10 slope = - 2 slope = - 0.2 p 1 p 1 X 1 * X 1 * In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ?

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Own-Price Elasticity of Demand 5 50 10 10 slope = - 2 slope = - 0.2 p 1 p 1 10-packs Single Units X 1 * X 1 * In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ?
Own-Price Elasticity of Demand 5 50 10 10 slope = - 2 slope = - 0.2 p 1 p 1 10-packs

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