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. Adding up demand curves: The horizontal summation principle.

+ = Horizontal summation

PRICE DEMAND CURVE D(p) QUANTITY It is the sum of the individual demand curve The market 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, |ε| = 1 ).

Elasticity and revenue. R = pq, ΔR = qΔp + pΔq, and then ΔR/ Δp = q [ 1 +ε(p) ] where 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 curve p = a – b q p267

Strikes and profits. The Laffer curve. Strikes and profits. The Laffer curve. Similarly, MR = ΔR / Δq = p (q) [ /ε(q) ] where ε( q ) = ( pΔq ) / (qΔp).

The income elasticity of demand. The arc elasticity and the point elasticity.

PRICE QUANTITY a a/2 Slope=-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 16 Equilibrium

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 supply demand

Shortage is not scarcity.

QUANTITY PRICE p* q* Demand curve Supply curve PRICE QUANTITY q* p* Supply curve Demand curve AB Special cases of equilibrium p286

Algebra of the equilibrium. Comparative statics. Shifting both curves. p289

Taxes. Distinguish P p, the price paid by consumers, P r, the price received by producers, and P o, 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