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