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Unformatted text preview: Chapter Fifteen Market Demand From Individual to Market Demand Functions Think of an economy containing n consumers, denoted by i = 1, ,n. Consumer is 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 pricetakers, 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 = 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 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 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 x y x y , % % . = 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 (ownprice elasticity of demand) demand for commodity i with respect to the price of commodity j (crossprice 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 (ownprice elasticity of supply) 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. OwnPrice Elasticity of Demand Q: Why not use a demand curves slope to measure the sensitivity of quantity demanded to a change in a commoditys own price? OwnPrice 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 * OwnPrice 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 ? OwnPrice Elasticity of Demand 5 50 10 10 slope =  2 slope =  0.2 p 1 p 1 10packs Single Units X 1 * X 1 * In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ? OwnPrice Elasticity of Demand...
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This note was uploaded on 01/06/2012 for the course ECON 102 taught by Professor Goodhart during the Spring '11 term at Abu Dhabi University.
 Spring '11
 GOODHART

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