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Market Demand: Understanding Individual and Aggregate Demand, Elasticity, and Revenue, Lecture notes of Supply Management

Los Angeles Film School Supply Management

The concept of market demand, discussing how to calculate it as the sum of individual demands, the representative consumer model, the inverse of aggregate demand curve, and the reservation price model. Additionally, it covers elasticity, how it measures the responsiveness of demand to price, and how revenue changes with price and quantity. The document also introduces the Laffer curve and its implications for tax revenue.

What you will learn

What is market demand and how is it calculated?
How does elasticity measure the responsiveness of demand to price?
What is the representative consumer model and how is it used to understand market demand?

What is the Laffer curve and how does it impact tax revenue?

Typology: Lecture notes

2021/2022

Uploaded on 09/12/2022

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Market Demand 99

Market Demand

A. Toget marketdemand, just addup individualdemands.

1. add horizontally

2. properly account for zero demands; Figure 15.2.

Market demand =

sum of the two

demand curves

Agent 1's

demand Agent 2's

demand

D (p )

PRICEPRICE PRICE

CBA

D (p )

Figure 15.2

Partial preview of the text

Download Market Demand: Understanding Individual and Aggregate Demand, Elasticity, and Revenue and more Lecture notes Supply Management in PDF only on Docsity!

Market Demand

A. To get market demand, just add up individual demands.

1. add horizontally

2. properly account for zero demands; Figure 15.2.

Market demand =sum of the two demand curves

Agent 1'sdemand Agent 2'sdemand

D (^) 1 ( p (^) 1 )

D (^) 2 ( p (^) 2 )

PRICE PRICE PRICE 20 15 10 5

20 15 10 5 x (^) 1 x 2 x 1 + x 2 A B C

D (^) 1 ( p (^) 1 ) + D (^) 2 ( p (^) 2 )

20 15 10 5

Figure 15.

B. Often think of market behaving like a single individual.

1. representative consumer model

2. not true in general, but reasonable assumption for

this course

C. Inverse of aggregate demand curve measures the

M R S for each individual.

D. Reservation price model

1. appropriate when one good comes in large discrete

units

2. reservation price is price that just makes a person

indifferent

3. defined by u(0; m) = u(1; m p 1 )

E. Elasticity

1. measures responsiveness of demand to price

p q

dq dp

3. example for linear demand curve

a) for linear demand, q = a bp, so = bp=q =

bp=(a bp)

b) note that = 1 when we are halfway down

the demand curve

c) see Figure 15.4.

4. suppose demand takes form q = Apb

5. then elasticity is given by

p q bApb^1 = bApb Apb^ = b

6. thus elasticity is constant along this demand curve

7. note that log q = log A b log p

8. what does elasticity depend on? In general how

many and how close substitutes a good has.

|ε| =

|ε| = 0

|ε| = 1

|ε| > 1

|ε| < 1

PRICE

a /2 b

a /2 QUANTITY

∞

Figure 15.

F. How does revenue change when you change price?

1. R = pq , so R = (p + dp)(q + dq ) = pq + pdq +

q dp + dpdq

2. last term is very small relative to others

3. dR =dp = q + p dq =dp

4. see Figure 15.5.

5. dR =dp > 0 when jej < 1

H. Marginal revenue curve

1. always the case that dR =dq = p + q dp=dq.

2. in case of linear (inverse) demand, p = a bq ,

M R = dR =dq = p bq = (a bq ) bq = a 2 bq.

I. Laffer curve

1. how does tax revenue respond to changes in tax

rates?

2. idea of Laffer curve: Figure 15.8.

TAXREVENUE

Maximumtax revenue Laffer curve

t * 1 TAX RATE

Figure 15.

3. theory is OK, but what do the magnitudes have to

be?

4. model of labor market, Figure 15.9.

Demandfor labor

Supply of laborif not taxed

Supply of laborif taxed S (^) S'

L L' LABOR

BEFORETAX WAGE

Figure 15.

5. tax revenue = T = t w S (w (t)) where w (t) =

(1 t) w

Market Demand: Understanding Individual and Aggregate Demand, Elasticity, and Revenue, Lecture notes of Supply Management

Related documents

Partial preview of the text

Download Market Demand: Understanding Individual and Aggregate Demand, Elasticity, and Revenue and more Lecture notes Supply Management in PDF only on Docsity!

Market Demand

A. To get market demand, just add up individual demands.

1. add horizontally

2. properly account for zero demands; Figure 15.2.

B. Often think of market behaving like a single individual.

1. representative consumer model

2. not true in general, but reasonable assumption for

this course

C. Inverse of aggregate demand curve measures the

M R S for each individual.

D. Reservation price model

1. appropriate when one good comes in large discrete

units

2. reservation price is price that just makes a person

indifferent

3. defined by u(0; m) = u(1; m p 1 )

E. Elasticity

1. measures responsiveness of demand to price

3. example for linear demand curve

a) for linear demand, q = a bp, so  = bp=q =

b) note that  = 1 when we are halfway down

the demand curve

c) see Figure 15.4.

4. suppose demand takes form q = Apb

5. then elasticity is given by

6. thus elasticity is constant along this demand curve

7. note that log q = log A b log p

8. what does elasticity depend on? In general how

many and how close substitutes a good has.

F. How does revenue change when you change price?

1. R = pq , so R = (p + dp)(q + dq ) = pq + pdq +

2. last term is very small relative to others

3. dR =dp = q + p dq =dp

4. see Figure 15.5.

5. dR =dp > 0 when jej < 1

H. Marginal revenue curve

1. always the case that dR =dq = p + q dp=dq.

2. in case of linear (inverse) demand, p = a bq ,

M R = dR =dq = p bq = (a bq ) bq = a 2 bq.

I. Laffer curve

1. how does tax revenue respond to changes in tax

rates?

2. idea of Laffer curve: Figure 15.8.

3. theory is OK, but what do the magnitudes have to

be?

4. model of labor market, Figure 15.9.

5. tax revenue = T = t w S (w (t)) where w (t) =

6. when is dT =dt < 0?

a) for linear demand, q = a bp, so = bp=q =

b) note that = 1 when we are halfway down

5. tax revenue = T = t w S (w (t)) where w (t) =