Download Chapter 15 Market Demand

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