Chapter 15 Market Demand One can think of the market demand as the demand of some “ representative...
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Transcript of Chapter 15 Market Demand One can think of the market demand as the demand of some “ representative...
Chapter 15Chapter 15
Market Market DemandDemand
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”.”.
Adding up demand curves: Adding up demand curves:
The horizontal The horizontal summation principle.summation principle.
+ =
Horizontal summatiHorizontal summationon
PRICE
DEMAND CURVE
D(p)
QUANTITY
It is the sum of the individual demand curve
The market demand curve
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 .
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 ).
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). .
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
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).
The income elasticity of demand.
The arc elasticityand
the point elasticity.
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.
MR = p(q)[1-1/e]
D, AR
QUANTITY
PRICE
Marginal revenue
MR for a constant elasticity demand curve
Chapter 16Chapter 16
EquilibriumEquilibrium
The market supply curve.
The competitive equilibrium.
Pareto efficiency.
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*
Market supply and market shortage
P*
P’
Q* QdQs
Market shortage
equilibrium
price
quantity
supplydemand
Shortage is not scarcity.Shortage is not scarcity.
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
Algebra of the equilibrium. Comparative statics. Shifting both curves. p289
Taxes. Distinguish
Pp , the price paid by consumers,
Pr , the price received by producer
s, and
Po , the original price.
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