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Chapter Fifteen Market Demand From Individual to Market Demand Functions Think of an economy containing n consumers, denoted by i = 1, … ,n. Consumer i’s ordinary demand function for commodity j is From Individual to Market Demand Functions When all consumers are price-takers, the market demand function for commodity j is From Individual to Market Demand Functions Elasticities Elasticity measures the “sensitivity” of one variable with respect to another. The elasticity of variable X with respect to variable Y is Own-Price Elasticity of Demand 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? A: Because the value of sensitivity then depends upon the (arbitrary) units of measurement used for quantity demanded. Arc and Point Elasticities An “average” own-price elasticity of demand for commodity i over an interval of values for pi is an arc-elasticity, usually computed by a mid-point formula. Elasticity computed for a single value of pi is a point elasticity. Arc Own-Price Elasticity Arc Own-Price Elasticity Point Own-Price Elasticity Point Own-Price Elasticity Point Own-Price Elasticity Point Own-Price Elasticity Point Own-Price Elasticity Point Own-Price Elasticity Point Own-Price Elasticity Revenue and Own-Price Elasticity of Demand If raising a commodity’s price causes little (a lot of ) decrease in quantity demanded, then sellers’ revenues rise. Hence own-price inelastic (elastic) demand causes sellers’ revenues to rise (drop) as price rises. Revenue and Own-Price Elasticity of Demand Revenue and Own-Price Elasticity of Demand Revenue and Own-Price Elasticity of Demand Revenue and Own-Price Elasticity of Demand Marginal Revenue and Own-Price Elasticity of Demand A seller’s marginal revenue is the rate at which revenue changes with the number of units sold by the seller. Marginal Revenue and Own-Price Elasticity of Demand Marginal Revenue and Own-Price Elasticity of Demand M
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