lecture9 - good at price p – Person i has income = I i...

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1 Up to Now • So far, we have shown that given a budget constraint and a description of preferences (utility), we can derive demand curves. • The effect of price changes on demand curves can be decomposed into into two effects: – Substitution effect – always negative – Income – negative if the good is normal Market Demand Curves • All this work has analyzed the demand curve of one individual. • But market demand curves are formed from the interaction of many individuals. • How do we go from the analysis that we have done up to now to market demand curves? Add Demands at a Given Price • Let d i (p, I i ) be the i th person’s demand for a
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Unformatted text preview: good at price p. – Person i has income = I i . • At any given price, the market demand, D, will be the sum of individual demands: ( ) ( ) ∑ = = N i i i n I p d I I I p D 1 2 1 , ... , , Features of Market Demand • Market demand is a function of the distribution of income in a market, rather than just mean income. • If all individual demand curves are downward sloping with respect to price, then the market demand curve will also be downward sloping. ( ) ( ) ∑ = = N i i i n I p d I I I p D 1 2 1 , ... , , Graphical Derivation p q The market demand curve is the horizontal sum of all the individual demand curves....
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