2. Chapter 15 Market Demand

3. One can think of the market demand as the demand of some “ representative consumer ”.

4. Adding up demand curves: The horizontal summation principle. Adding up demand curves: The horizontal summation principle.

5. + = Horizontal summation

6. PRICE DEMAND CURVE D(p) QUANTITY It is the sum of the individual demand curve The market demand curve

7. 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.

8. A good has an elastic ( inelastic, unitary) demand if |ε| > 1 ( |ε| 1 ( |ε| < 1, |ε| = 1 ).

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

10. 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

11. Strikes and profits. The Laffer curve. Strikes and profits. The Laffer curve. Similarly, MR = ΔR / Δq = p (q) [ 1 + 1 /ε(q) ] where ε( q ) = ( pΔq ) / (qΔp).

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

13. 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.

14. MR = p(q)[1-1/e] D, AR QUANTITY PRICE Marginal revenue MR for a constant elasticity demand curve

15. Chapter 16 Equilibrium

16. The market supply curve. The competitive equilibrium. Pareto efficiency.

17. 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*

18. Market supply and market shortage P* P’ Q* QdQs Market shortage equilibrium price quantity supply demand

19. Shortage is not scarcity.

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

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

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

23. 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