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Market Demand summary
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Market Demand summary
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ECO204-2022/23-Week 6Market Demand Summary
We build a market demand curve from individual demand curves and then investigate
some of its properties.
We obtain a market demand curve by summing up (horizontally) individual level demand
curves across consumers. In general, market demand will depend on the distribution of
incomes across people, but under certain restrictive assumptions it depends on aggregate
income. The slope of the aggregate demand curve reflects the slopes of the underlying
individual demand curves.
We graph market demand holding income(s) and the price(s) of the other good(s)
constant. Changing these will shift demand in or out (a shift of the curve, not a
movement along the curve). When we change income, which way demand shifts
depends on whether the good is normal or inferior. When we change the price of the
other good(s), which way demand shifts depends on whether the other good(s) is a
substitute or complement.
Elasticity
The price elasticity measures the responsiveness of demand to changes in prices. We
often want to know whether consumers will be “big responders” or “small responders” to
a change in price. We do not use the slope of the demand curve because it is sensitive to
the units in which demand is measured. Instead, we use percentage changes in quantities
and prices. For good i it is:
Δ𝑥!
%Δ𝑥! 𝑥 Δ𝑥! 𝑝! 𝜕𝑥! 𝑝!
𝜖= = ! = ∙ = ∙
%Δ𝑝! Δ𝑝 ! Δ𝑝! 𝑥! 𝜕𝑝! 𝑥!
𝑝!
Note we expect 𝜖 < 0 in most cases so we often take |𝜖|.
If |𝜖| < 1 we say demand is inelastic.
If |𝜖| > 1 we say demand is elastic.
If |𝜖| = 1 we say demand is unit elastic.
An important fact is that the demand elasticity is not constant along the demand curve,
even when the demand curve is linear and has a constant slope. In fact, along a linear
demand curve the elasticity ranges from 0 to ∞ .
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