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Market Demand from Individual Demand

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Market Demand from Individual Demand Market Demand from Individual Demand In this section we want to think about market demand as the result of adding up demands from ... – PowerPoint PPT presentation

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Title: Market Demand from Individual Demand


1
Market Demand from Individual Demand
2
In this section we want to think about market
demand as the result of adding up demands from
many individuals. Remember individual demand is
the result of each consumer going about utility
maximization. Lets do an example with 3 people.
qi is the demand from the ith consumer. Say, q1
10 - p, q2 15 - 2p, and q3 18-3p.
Often the demand is written in inverse form
(where we isolate the p term). We have p 10 -
q1, p 15/2 - (1/2)q2, and p 18/3 -
(1/3)q3 We usually express demand in inverse form
when we want to graph the demands in the P, Q
graph. I have a graph on the next screen with
each demand in it.
3
Note at a price above 10 no one demands any
units. At a price above 7.5 only person 1
demands units. At a price above 6 only person 1
and person 2 demand units. If price is below 6
all three people demand units. The dashed line
here is the market demand. It is found by
looking at each price and adding the quantities
each person would demand.
P
10
7.5
6
Q
10
15
18
4
To get the market demand we horizontally add the
demand from each person. This amounts to saying
q1 q2 q3 Q. We saw before the demand from
each person was q1 10 - p, q2 15 - 2p,
and q3 18-3p. To get the market demand we
add q1 q2 q3 to get (10 - p) (15 - 2p)
(18 -3p) (10 15 18) - (p 2p 3P), or Q
43 - 6P, but this is only true when price is less
than or equal to 6. In other words all three
people demand units when the price is less than
6. Note if P 1 q1 9, q2 13, q3 15 and Q
37, or if P 2 q1 8, q2 11, q3 12 and Q
31.
5
Remember if the price is above 6 but less than or
equal to 7.5 the demand comes from only the first
two people and the demand curve is q1 q2 Q
25 - 39, and if the price is above 7.5 the demand
is only from the first person and the demand
curve is q1 Q 10 - p. So the market demand
curve we have come to know and work with is
really the addition of the demand from many
people as they have gone about maximizing their
utility.
P
Q
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