Download presentation

Presentation is loading. Please wait.

Published byLewis Wyler Modified over 2 years ago

1
© 2010 W. W. Norton & Company, Inc. 15 Market Demand

2
© 2010 W. W. Norton & Company, Inc. 2 From Individual to Market Demand Functions u Think of an economy containing n consumers, denoted by i = 1, …,n. u Consumer i’s ordinary demand function for commodity j is

3
© 2010 W. W. Norton & Company, Inc. 3 From Individual to Market Demand Functions u When all consumers are price-takers, the market demand function for commodity j is u If all consumers are identical then where M = nm.

4
© 2010 W. W. Norton & Company, Inc. 4 From Individual to Market Demand Functions u The market demand curve is the “horizontal sum” of the individual consumers’ demand curves. u E.g. suppose there are only two consumers; i = A,B.

5
© 2010 W. W. Norton & Company, Inc. 5 From Individual to Market Demand Functions p1p1 p1p1 2015 p1’p1’ p1”p1” p1’p1’ p1”p1”

6
© 2010 W. W. Norton & Company, Inc. 6 From Individual to Market Demand Functions p1p1 p1p1 p1p1 2015 p1’p1’ p1”p1” p1’p1’ p1”p1” p1’p1’

7
© 2010 W. W. Norton & Company, Inc. 7 From Individual to Market Demand Functions p1p1 p1p1 p1p1 2015 p1’p1’ p1”p1” p1’p1’ p1”p1” p1’p1’ p1”p1”

8
© 2010 W. W. Norton & Company, Inc. 8 From Individual to Market Demand Functions p1p1 p1p1 p1p1 2015 35 p1’p1’ p1”p1” p1’p1’ p1”p1” p1’p1’ p1”p1” The “horizontal sum” of the demand curves of individuals A and B.

9
© 2010 W. W. Norton & Company, Inc. 9 Elasticities u Elasticity measures the “sensitivity” of one variable with respect to another. u The elasticity of variable X with respect to variable Y is

10
© 2010 W. W. Norton & Company, Inc. 10 Economic Applications of Elasticity u Economists use elasticities to measure the sensitivity of –quantity demanded of commodity i with respect to the price of commodity i (own-price elasticity of demand) –demand for commodity i with respect to the price of commodity j (cross-price elasticity of demand).

11
© 2010 W. W. Norton & Company, Inc. 11 Economic Applications of Elasticity –demand for commodity i with respect to income (income elasticity of demand) –quantity supplied of commodity i with respect to the price of commodity i (own-price elasticity of supply)

12
© 2010 W. W. Norton & Company, Inc. 12 Economic Applications of Elasticity –quantity supplied of commodity i with respect to the wage rate (elasticity of supply with respect to the price of labor) –and many, many others.

13
© 2010 W. W. Norton & Company, Inc. 13 Own-Price Elasticity of Demand u Q: Why not use a demand curve’s slope to measure the sensitivity of quantity demanded to a change in a commodity’s own price?

14
© 2010 W. W. Norton & Company, Inc. 14 Own-Price Elasticity of Demand X1*X1* 550 10 slope = - 2 slope = - 0.2 p1p1 p1p1 In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ? X1*X1*

15
© 2010 W. W. Norton & Company, Inc. 15 Own-Price Elasticity of Demand 550 10 slope = - 2 slope = - 0.2 p1p1 p1p1 X1*X1* X1*X1* In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ?

16
© 2010 W. W. Norton & Company, Inc. 16 Own-Price Elasticity of Demand 550 10 slope = - 2 slope = - 0.2 p1p1 p1p1 10-packsSingle Units X1*X1* X1*X1* In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ?

17
© 2010 W. W. Norton & Company, Inc. 17 Own-Price Elasticity of Demand 550 10 slope = - 2 slope = - 0.2 p1p1 p1p1 10-packsSingle Units X1*X1* X1*X1* In which case is the quantity demanded X 1 * more sensitive to changes to p 1 ? It is the same in both cases.

18
© 2010 W. W. Norton & Company, Inc. 18 Own-Price Elasticity of Demand u Q: Why not just use the slope of a demand curve to measure the sensitivity of quantity demanded to a change in a commodity’s own price? u A: Because the value of sensitivity then depends upon the (arbitrary) units of measurement used for quantity demanded.

19
© 2010 W. W. Norton & Company, Inc. 19 Own-Price Elasticity of Demand is a ratio of percentages and so has no units of measurement. Hence own-price elasticity of demand is a sensitivity measure that is independent of units of measurement.

20
© 2010 W. W. Norton & Company, Inc. 20 Arc and Point Elasticities u An “average” own-price elasticity of demand for commodity i over an interval of values for p i is an arc- elasticity, usually computed by a mid-point formula. u Elasticity computed for a single value of p i is a point elasticity.

21
© 2010 W. W. Norton & Company, Inc. 21 Arc Own-Price Elasticity pipi Xi*Xi* pi’pi’ p i ’+h p i ’-h What is the “average” own-price elasticity of demand for prices in an interval centered on p i ’?

22
© 2010 W. W. Norton & Company, Inc. 22 Arc Own-Price Elasticity pipi Xi*Xi* pi’pi’ p i ’+h p i ’-h What is the “average” own-price elasticity of demand for prices in an interval centered on p i ’?

23
© 2010 W. W. Norton & Company, Inc. 23 Arc Own-Price Elasticity pipi Xi*Xi* pi’pi’ p i ’+h p i ’-h What is the “average” own-price elasticity of demand for prices in an interval centered on p i ’?

24
© 2010 W. W. Norton & Company, Inc. 24 Arc Own-Price Elasticity pipi Xi*Xi* pi’pi’ p i ’+h p i ’-h What is the “average” own-price elasticity of demand for prices in an interval centered on p i ’?

25
© 2010 W. W. Norton & Company, Inc. 25 Arc Own-Price Elasticity pipi Xi*Xi* pi’pi’ p i ’+h p i ’-h What is the “average” own-price elasticity of demand for prices in an interval centered on p i ’?

26
© 2010 W. W. Norton & Company, Inc. 26 Arc Own-Price Elasticity

27
© 2010 W. W. Norton & Company, Inc. 27 Arc Own-Price Elasticity So is the arc own-price elasticity of demand.

28
© 2010 W. W. Norton & Company, Inc. 28 Point Own-Price Elasticity pipi Xi*Xi* pi’pi’ p i ’+h p i ’-h What is the own-price elasticity of demand in a very small interval of prices centered on p i ’?

29
© 2010 W. W. Norton & Company, Inc. 29 Point Own-Price Elasticity pipi Xi*Xi* pi’pi’ p i ’+h p i ’-h What is the own-price elasticity of demand in a very small interval of prices centered on p i ’? As h 0,

30
© 2010 W. W. Norton & Company, Inc. 30 Point Own-Price Elasticity pipi Xi*Xi* pi’pi’ p i ’+h p i ’-h What is the own-price elasticity of demand in a very small interval of prices centered on p i ’? As h 0,

31
© 2010 W. W. Norton & Company, Inc. 31 Point Own-Price Elasticity pipi Xi*Xi* pi’pi’ p i ’+h p i ’-h What is the own-price elasticity of demand in a very small interval of prices centered on p i ’? As h 0,

32
© 2010 W. W. Norton & Company, Inc. 32 Point Own-Price Elasticity pipi Xi*Xi* pi’pi’ What is the own-price elasticity of demand in a very small interval of prices centered on p i ’? As h 0,

33
© 2010 W. W. Norton & Company, Inc. 33 Point Own-Price Elasticity pipi Xi*Xi* pi’pi’ What is the own-price elasticity of demand in a very small interval of prices centered on p i ’? is the elasticity at the point

34
© 2010 W. W. Norton & Company, Inc. 34 Point Own-Price Elasticity E.g. Suppose p i = a - bX i. Then X i = (a-p i )/b and Therefore,

35
© 2010 W. W. Norton & Company, Inc. 35 Point Own-Price Elasticity pipi Xi*Xi* p i = a - bX i * a a/b

36
© 2010 W. W. Norton & Company, Inc. 36 Point Own-Price Elasticity pipi Xi*Xi* p i = a - bX i * a a/b

37
© 2010 W. W. Norton & Company, Inc. 37 Point Own-Price Elasticity pipi Xi*Xi* p i = a - bX i * a a/b

38
© 2010 W. W. Norton & Company, Inc. 38 Point Own-Price Elasticity pipi Xi*Xi* p i = a - bX i * a a/b

39
© 2010 W. W. Norton & Company, Inc. 39 Point Own-Price Elasticity pipi Xi*Xi* a p i = a - bX i * a/b

40
© 2010 W. W. Norton & Company, Inc. 40 Point Own-Price Elasticity pipi Xi*Xi* a p i = a - bX i * a/b a/2 a/2b

41
© 2010 W. W. Norton & Company, Inc. 41 Point Own-Price Elasticity pipi Xi*Xi* a p i = a - bX i * a/b a/2 a/2b

42
© 2010 W. W. Norton & Company, Inc. 42 Point Own-Price Elasticity pipi Xi*Xi* a p i = a - bX i * a/b a/2 a/2b

43
© 2010 W. W. Norton & Company, Inc. 43 Point Own-Price Elasticity pipi Xi*Xi* a p i = a - bX i * a/b a/2 a/2b own-price elastic own-price inelastic

44
© 2010 W. W. Norton & Company, Inc. 44 Point Own-Price Elasticity pipi Xi*Xi* a p i = a - bX i * a/b a/2 a/2b own-price elastic own-price inelastic (own-price unit elastic)

45
© 2010 W. W. Norton & Company, Inc. 45 Point Own-Price Elasticity E.g.Then so

46
© 2010 W. W. Norton & Company, Inc. 46 Point Own-Price Elasticity pipi Xi*Xi* everywhere along the demand curve.

47
© 2010 W. W. Norton & Company, Inc. 47 Revenue and Own-Price Elasticity of Demand u If raising a commodity’s price causes little decrease in quantity demanded, then sellers’ revenues rise. u Hence own-price inelastic demand causes sellers’ revenues to rise as price rises.

48
© 2010 W. W. Norton & Company, Inc. 48 Revenue and Own-Price Elasticity of Demand u If raising a commodity’s price causes a large decrease in quantity demanded, then sellers’ revenues fall. u Hence own-price elastic demand causes sellers’ revenues to fall as price rises.

49
© 2010 W. W. Norton & Company, Inc. 49 Revenue and Own-Price Elasticity of Demand Sellers’ revenue is

50
© 2010 W. W. Norton & Company, Inc. 50 Revenue and Own-Price Elasticity of Demand Sellers’ revenue is So

51
© 2010 W. W. Norton & Company, Inc. 51 Revenue and Own-Price Elasticity of Demand Sellers’ revenue is So

52
© 2010 W. W. Norton & Company, Inc. 52 Revenue and Own-Price Elasticity of Demand Sellers’ revenue is So

53
© 2010 W. W. Norton & Company, Inc. 53 Revenue and Own-Price Elasticity of Demand

54
© 2010 W. W. Norton & Company, Inc. 54 Revenue and Own-Price Elasticity of Demand so ifthen and a change to price does not alter sellers’ revenue.

55
© 2010 W. W. Norton & Company, Inc. 55 Revenue and Own-Price Elasticity of Demand but ifthen and a price increase raises sellers’ revenue.

56
© 2010 W. W. Norton & Company, Inc. 56 Revenue and Own-Price Elasticity of Demand And ifthen and a price increase reduces sellers’ revenue.

57
© 2010 W. W. Norton & Company, Inc. 57 Revenue and Own-Price Elasticity of Demand In summary: Own-price inelastic demand; price rise causes rise in sellers’ revenue. Own-price unit elastic demand; price rise causes no change in sellers’ revenue. Own-price elastic demand; price rise causes fall in sellers’ revenue.

58
© 2010 W. W. Norton & Company, Inc. 58 Marginal Revenue and Own- Price Elasticity of Demand u A seller’s marginal revenue is the rate at which revenue changes with the number of units sold by the seller.

59
© 2010 W. W. Norton & Company, Inc. 59 Marginal Revenue and Own- Price Elasticity of Demand p(q) denotes the seller’s inverse demand function; i.e. the price at which the seller can sell q units. Then so

60
© 2010 W. W. Norton & Company, Inc. 60 Marginal Revenue and Own- Price Elasticity of Demand and so

61
© 2010 W. W. Norton & Company, Inc. 61 Marginal Revenue and Own- Price Elasticity of Demand says that the rate at which a seller’s revenue changes with the number of units it sells depends on the sensitivity of quantity demanded to price; i.e., upon the of the own-price elasticity of demand.

62
© 2010 W. W. Norton & Company, Inc. 62 Marginal Revenue and Own- Price Elasticity of Demand Ifthen Ifthen Ifthen

63
© 2010 W. W. Norton & Company, Inc. 63 Selling one more unit raises the seller’s revenue. Selling one more unit reduces the seller’s revenue. Selling one more unit does not change the seller’s revenue. Marginal Revenue and Own- Price Elasticity of Demand Ifthen Ifthen Ifthen

64
© 2010 W. W. Norton & Company, Inc. 64 Marginal Revenue and Own- Price Elasticity of Demand An example with linear inverse demand. Then and

65
© 2010 W. W. Norton & Company, Inc. 65 Marginal Revenue and Own- Price Elasticity of Demand a a/b p qa/2b

66
© 2010 W. W. Norton & Company, Inc. 66 Marginal Revenue and Own- Price Elasticity of Demand a a/b p qa/2b q $ a/ba/2b R(q)

Similar presentations

Presentation is loading. Please wait....

OK

Chapter 6 Elasticity and Demand.

Chapter 6 Elasticity and Demand.

© 2018 SlidePlayer.com Inc.

All rights reserved.

Ads by Google

Ppt on surface water contamination Ppt on fair and lovely Simple ppt on body language Ppt on network theory communication Ppt on travel and tourism for class 10 Ppt on object-oriented programming php A ppt on loch ness monster facts Ppt on health effects of air pollution in delhi Viewer ppt online ticket Ppt on power transmission and distribution in india