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# Chapter 4 part_2_copy1

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### Chapter 4 part_2_copy1

1. 1. Market DemandIndividual demand curves may be aggregated(summed up) to form the market demand curve.This process is known as horizontal summation.Individual demand curves may also be aggregatedalgebraically. 4-1
2. 2. Figure 4-16: Generating MarketDemand from Individual Demands 4-2
3. 3. Market DemandWhat happens if all consumers areidentical?Suppose there n consumers with thedemand curve given by P = a – bQi. Whatwill the market demand curve be? 4-3
4. 4. Figure 4-18: Market Demand with Identical Consumers 4-4
5. 5. Price Elasticity of DemandPrice elasticity of demand is the percentagechange in quantity demanded as a result of a1% change in price.Price elasticity is always negative, why? 4-5
6. 6. Price Elasticity of Demandε < -1  elasticε > -1  inelasticε = -1  unit elasticε = ΔQ/Q ΔP/P 4-6
7. 7. Figure 4-19: Three Categories of Price Elasticity 4-7
8. 8. A Geometric Interpretation of Price Elasticity ε = ΔQ.P ΔP Q ΔP  slope of the demand curve. ΔQ Point slope method : ε = P. 1 1 Q slope 4-8
9. 9. Figure 4-20: The Point-Slope Method 4-9
10. 10. A Geometric Interpretation of Price Elasticity Linear market demand curve gives rise to 3 important properties of elasticities : Price elasticity is different at every point along the demand curve Price elasticity is never positive Price elasticity is inversely related to the slope of the demand curve. 4-10
11. 11. Figure 4-21: Two Important Polar Cases 4-11
12. 12. Figure 4-22: Elasticity is Unit-Free 4-12
13. 13. Elasticity and Total Expenditure If the price of a product changes, how will the total amount spent on the product be affected? Use price elasticity of demand to answer this question. 4-13
14. 14. Figure 4-23: The Effect on TotalExpenditure of a Reduction in Price 4-14
15. 15. Elasticity and Total Expenditure General rules for small price reductions : Total revenue increases if and only if the absolute value of price elasticity is more than 1. Total revenue decreases if and only if the absolute value of price elasticity is less than 1. 4-15
16. 16. Figure 4-24: Demand and Total Expenditure 4-16
17. 17. Determinants of Price Elasticity of Demand Factors that govern the size of the price elasticity of demand : Substitutability Budget share Direction of income effect Time 4-17
18. 18. Figure 4-26: Price Elasticity IsGreater in the Long Run than in the Short Run 4-18
19. 19. The Dependence of Market Demand on Income The quantity of a good demanded depends not only on its price but also on the person’s income. Engel curves at the market level relate the quantity demanded to the average income level in the market. 4-19
20. 20. Figure 4-27: The Engel Curve for Food of A and B 4-20
21. 21. Figure 4-28: Market DemandSometimes Depends on the Distribution of Income 4-21
22. 22. Figure 4-29: An Engel Curve at the Market Level 4-22
23. 23. Figure 4-30: Engel Curves for Different Types of Goods 4-23
24. 24. Income Elasticity of DemandIncome elasticity of demand measures thedegree to which consumers respond to achange in their incomes by buying more orless of a particular good.η = ΔQ/Q ΔY/Y 4-24
25. 25. Income Elasticity of DemandNecessities :0<η<1Luxuries :η>1Inferior Goods : η < 0η = 1  straight Engel curve passing through the origin. 4-25
26. 26. Income Elasticity of DemandAn easier interpretation : η = Y.ΔQ Q ΔYWhen distinguishing between the Engelcurves for necessities and luxuries, oneneeds to compare the slopes of the Engelcurves with the corresponding rays. 4-26
27. 27. Cross-Price Elasticities of Demand Cross-price elasticity of demand is the percentage change in quantity demanded of one good caused by a 1 percent change in the price of another good. єxz = ΔQx/Qx ΔPz/Pz Compliments : єxz < 0 Substitutes : єxz > 0 4-27