1. Aggregate Demand How do we get aggregate demand from individual demands? Two people with demands xA(p1,p2,m) and xB(p1,p2,m). Aggregate demand X=xA+xB. What does this look like with demand curves? Horizontal or Vertical addition?

2. Information Technology Phones, Faxes, e-mail, etc. all have the following property: –Network externalities: The more people using it the more benefit it is to each user. Computers, VCRs, PS2s, also have this property in that both software can be traded among users and the larger the user market, the larger number of software titles are made. How do markets operate with such externalities?

3. Competition & Network Externalities Individuals 1,…,1000 (call this number v) Each can buy one unit of a good providing a network externality. Person v values a unit of the good at nv, where n is the number of persons who buy the good.

4. Competition & Network Externalities What is the demand at price p? If v is the marginal buyer, valuing the good at nv = p, then all buyers v’ > v value the good more, and so buy it. Quantity demanded is n = 1000 - v. So inverse demand is p = n(1000-n). Graph this! What is the supply curve if marginal cost c<250,000?

5. Competition & Network Externalities What are the market equilibria? Zero. A large numbers of buyers buy. –large n*  large network externality value n*v –good is bought only by buyers with n*v  c; i.e. only large v  v* = c/n*. The other point is unstable and called a threshold point. Below this, demand will go to zero. Above this, the product would be a hit.

6. Discussion points Competitors: Sony vs. Beta, Qwerty vs. Dvorak, Windows vs. Mac, Playstation vs. Xbox. Does the best always win?

7. Demand Review What is aggregate demand if –XA=10-p. –XB=20-p. What about if they only consume positive amounts of a good? –XA=Max{10-p,0}. –XB=Max{20-p,0}.