Microennomics Expert
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micro4.pptx0
Market Demand
Market demand curve Curve relating the quantity of a good that all consumers in a market will buy to its price.
If you have the individual demand then the market demand is the horizontal sum of the individual demands.
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Market Demand
Summing to Obtain a Market Demand Curve
Three consumers (A, B, C) with given demands
=> Market demand curve:
Sum the three demand curves: DA, DB, and DC.
=> At each price, the quantity demanded by the market is the sum of the quantities demanded by each consumer.
Price of $4,
=> Market demand = 11 units (sum of the quantity demanded by A (no units), B (4 units), and C (7 units).
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Market Demand
Example, we might obtain information about the demand for home computers by adding independently obtained information about the demands of the following groups:
Households with children
Households without children
Single individuals
Two Notes:
The market demand curve will shift to the right as more consumers enter the market.
Factors that influence the demands of many consumers will also affect market demand.
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Market Demand
Elasticity of Demand
Denoting the quantity of a good by Q and its price by P, the price elasticity of demand is
Inelastic Demand
|Ep |< 1 (absolute value is less than one): The quantity demanded not responsive to changes in price.
=> Total expenditure on the product increases when the price increases.
Elastic Demand
|Ep |> 1 (absolute value is more than one): The quantity demanded responsive to changes in price.
=> Total expenditure on the product declines when the price increases.
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Market Demand
Elasticity of Demand
Isoelastic Demand
Isoelastic demand curve Demand curve with a constant price elasticity.
Unit-Elastic Demand Curve
When the price elasticity of demand is −1.0 at every price, the total expenditure is constant along the demand curve D.
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Domestic demand for wheat:
QDD = 1430 – 55P
QDD: number of bushels (in millions) demanded domestically, and P is the price in dollars per bushel.
Export demand is:
QDE = 1470 − 70P
QDE: number of bushels (in millions) demanded from abroad.
Market (aggregate) Demand:
QDD + QDE = (1430 − 55P) + (1470 − 70P) = 2900 − 125P
Market Demand
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Market Demand
The Aggregate Demand for Wheat
Horizontal sum of the domestic demand AB and the export demand CD.
Note: Each individual demand curve is linear, but the market demand curve is kinked.
- No export demand when the price of wheat is greater than $21.
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Consumer Surplus
consumer surplus Difference between what a consumer is willing to pay for a good and the amount actually paid.
Consumer Surplus and Demand
Consumer Surplus
The total benefit from the consumption of a product
Minus
The total cost of purchasing it.
Consumer surplus for the purchase of six concert tickets at $14 =the yellow-shaded area.
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Consumer Surplus
Consumer Surplus and Demand
Consumer Surplus Generalized
For the market: Consumer surplus is the area under the demand curve and above the line representing the purchase price of the good.
The yellow-shaded triangle = 1/2 × ($20 − $14) × 6500 = $19,500.
Applying Consumer Surplus
A tool for welfare analysis, discussed in ECMC02: In aggregate, it measures the total benefit that consumers obtain from buying goods in a market.
When we combine consumer surplus with the aggregate profits that producers obtain, we can evaluate both the costs and benefits not only of alternative market structures, but of public policies that alter the behavior of consumers and firms in those markets.
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Consumer Surplus (Application)
The effect of Clean Air Act in 1977.
Valuing Cleaner Air
The yellow-shaded triangle: The consumer surplus generated when air pollution is reduced by 5 parts per 100 million of nitrogen oxide at a cost of $1000 per part reduced.
The surplus is created because most consumers are willing to pay more than $1000 for each unit reduction of nitrogen oxide.
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Numerical Example
There are 100 consumers in the economy. Half of them live in city A and demand popcorn according to the individual inverse demand curve P = 10 − 2Q. The other half live in city B and demand popcorn according to the individual inverse demand curve P = 16−4Q. Suppose that the market-clearing price for popcorn is $4.
a) At the market-clearing price, how many popcorns does each resident of city A buy? What is the price elasticity of demand by residents of city A at this point?
b) Repeat (a) for residents of city B.
c) What is the market demand for popcorn in this economy? Is the market demand function linear? If not, where is the kink?
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Numerical Example
d) Using the market demand function derived in part (c), what is the total quantity demanded in this economy at the market-clearing price? What is the price elasticity of market demand at this point? Is the absolute value of the price elasticity of market demand larger than the absolute value of the price elasticity of individual demand?
e) If the price increases from $4 to $10, how does the consumer surplus change? Graph the demand curve with quantity on the horizontal axis and price on the vertical axis, and show the change in consumer surplus.
