chapter 15 market demand one can think of the market demand as the demand of some “ representative...
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Chapter 15Chapter 15
Market Market DemandDemand
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One can think of the One can think of the market demandmarket demand as the as the
demand of some demand of some ““representative consumerrepresentative consumer”.”.
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Adding up demand curves: Adding up demand curves:
The horizontal The horizontal summation principle.summation principle.
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+ =
Horizontal summatiHorizontal summationon
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PRICE
DEMAND CURVE
D(p)
QUANTITY
It is the sum of the individual demand curve
The market demand curve
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The The price elasticity of demandprice elasticity of demand::
εε= (Δq / q ) / (Δp / p)= (Δq / q ) / (Δp / p) = ( p / q ) / (Δp /Δq), or = ( p / q ) / (Δp /Δq), or
εε= ( d q / q ) / ( d p / p)= ( d q / q ) / ( d p / p) = ( p / q ) / ( d p / d q) = ( p / q ) / ( d p / d q) = = slope of rayslope of ray / / slope of curve .slope of curve .
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A good has anA good has an
elasticelastic ( ( inelasticinelastic, , unitaryunitary) ) demanddemand
if if
|ε| > 1 ( |ε| < 1 , |ε| = 1 ).|ε| > 1 ( |ε| < 1 , |ε| = 1 ).
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Elasticity and revenue.Elasticity and revenue.
R = pq, ΔR = qΔp + pΔq R = pq, ΔR = qΔp + pΔq , and t, and then hen
ΔR/ Δp = q [ 1 +ε(p) ]ΔR/ Δp = q [ 1 +ε(p) ] where where
ε( p ) = ( pΔq ) / (qΔp)ε( p ) = ( pΔq ) / (qΔp). .
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QUANTITY
PRICE
a /2
a / 2b
︱ ε︱ =∞
︱ ε ︱ >1
︱ ε ︱ =1
︱ ε ︱ <1
︱ ε ︱ =0
The elasticity of a linear demand curveThe elasticity of a linear demand curvep = a – b q
p267
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Strikes and profits.Strikes and profits. The Laffer curve.The Laffer curve.
Similarly, Similarly, MR = ΔR / Δq MR = ΔR / Δq = p (q) [ 1 + 1 /ε(q) ] = p (q) [ 1 + 1 /ε(q) ] where where ε( q ) = ( pΔq ) / (qΔp). ε( q ) = ( pΔq ) / (qΔp).
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The income elasticity of demand.
The arc elasticityand
the point elasticity.
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PRICE
QUANTITY
a
a/2Slope=-2b
Slope=-b
a/2b a/b
MR
Demand, AR
Marginal revenue p275
Marginal revenue for a linear demand curve.
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MR = p(q)[1-1/e]
D, AR
QUANTITY
PRICE
Marginal revenue
MR for a constant elasticity demand curve
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Chapter 16Chapter 16
EquilibriumEquilibrium
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The market supply curve.
The competitive equilibrium.
Pareto efficiency.
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Supply
Demand
QUANTITY
PRICE
P’d
Pd=Ps=P*
P’s
Willing to
buy at this price
Willing to sell at this price Q’
Pareto efficiency p301
Q*
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Market supply and market shortage
P*
P’
Q* QdQs
Market shortage
equilibrium
price
quantity
supplydemand
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Shortage is not scarcity.Shortage is not scarcity.
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QUANTITY
PRICE
p*
q*
Demand curve
Supply curvePRICE
QUANTITYq*
p*Supply curve
Demand curve
A B
Special cases of equilibrium p286Special cases of equilibrium p286
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Algebra of the equilibrium. Comparative statics. Shifting both curves. p289
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Taxes. Distinguish
Pp , the price paid by consumers,
Pr , the price received by producer
s, and
Po , the original price.
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Supply
Demand
QUANTITY
PRICE
A
C
Pp
Pr
Q*
Amount of tax revenue:
A+C
The deadweight loss of a tax p296
The deadweight loss of the tax: B+D
B
D