Lecture 7. Market Demand

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1、LectureSevenMarketDemand&ElasticityIntermediateMicroeconomicsThinkofaneconomycontainingnconsumers,denotedbyi=1,…,n.Consumeri’sordinarydemandfunctionforcommodityjisWhenallconsumersareprice-takers,themarketdemandfunctionforcommodityjisFromIndividualtoMarketDemandFunctionsp1FromIndivid

2、ualtoMarketDemandFunctionsp1p1201535p1’p1”p1’p1”p1’p1”Marketdemandcurveisthe“horizontalsum”ofthedemandcurvesofindividualsAandB.SupposetherearetwoconsumersRepresentativeConsumerTheaggregatedemanddependsonpricesandthedistributionofincomes.Representativeconsumerisaimaginarypeoplewhoh

3、asanincomethatisjustthesumofallindividualincomeshasademandsamewiththeaggregatedemand.TherepresentativeconsumerassumptionmeanstheaggregatedemandfunctionhastheformTheInverseDemandFunctionInversedemandfunctionistheinverseofthedemandfunction,Pj(X).Thisfunctionmeasureswhatthemarketpricefo

4、rgoodjwouldhavetobeforXunitsofittobedemanded.Ifallconsumersfacethesameprices,theinversedemandfunctionmeasuresthemarginalwillingnesstopayofeveryconsumerwhoispurchasingthegood.p1DiscreteGoodsp1p11135p1’p1”p1’p1”p1’p1”Adecreaseinthepriceincreasethenumberofconsumers.Supposethegoodisavail

5、ableonlyinunitsofzerooroneExtensiveandIntensiveMarginIntensivemargin:Whenpricechanges,eachconsumerdecidestoconsumemoreorlessofsomegoods.Extensivemargin:Whenpricechanges,theconsumersdecideswhetherornottoenterthemarketforsomegoods(reservation-pricemodel).Theslopeoftheaggregatedemandcur

6、vewillbeaffectedbybothsortsofdecisions.Theslopeofademandfunctioncouldbeameasureofhowresponsivethedemandistothechangeinprice.Theproblemsofthismeasureisthattheslopedependsontheunitstomeasurepriceandquantity.Elasticitycouldbeanothermeasure,anditisunit-free.PriceElasticityofDemandPriceEl

7、asticityofDemand5501010Slope=-2Slope=-0.2pp10-packsSingleUnitsqqInwhichcaseisthequantitydemandedqmoresensitivetochangesinp1?Itisthesameinbothcases.TheelasticityofvariableXwithrespecttovariableYisThepriceelasticityofdemandisdefinedtobetherateofchangeinquantitydividedbytherateofchangein

8、price.PriceE