The document discusses various concepts relating to demand, including: 1) Individual demand curves can be aggregated to form a market demand curve through horizontal summation or algebraic aggregation. 2) If all consumers are identical, with demand curves of P = a - bQi, then the market demand curve will also take this form with the total quantity demanded. 3) Price elasticity of demand measures the responsiveness of quantity demanded to a change in price, and can be used along with the slope of the demand curve to understand how changes in price may affect total expenditure. 4) Demand is also influenced by income - income elasticity measures the responsiveness of quantity demanded to changes in income, and can

1. Market Demand
Individual 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 aggregated
algebraically.
4-1

2. Figure 4-16: Generating Market
Demand from Individual Demands
4-2

3. Market Demand
What happens if all consumers are
identical?
Suppose there n consumers with the
demand curve given by P = a – bQi. What
will the market demand curve be?
4-3

4. Figure 4-18: Market Demand with
Identical Consumers
4-4

5. Price Elasticity of Demand
Price elasticity of demand is the percentage
change in quantity demanded as a result of a
1% change in price.
Price elasticity is always negative, why?
4-5

6. Price Elasticity of Demand
ε < -1  elastic
ε > -1  inelastic
ε = -1  unit elastic
ε = ΔQ/Q
ΔP/P
4-6

7. Figure 4-19: Three Categories
of Price Elasticity
4-7

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. Figure 4-20: The Point-Slope Method
4-9

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. Figure 4-21: Two Important Polar
Cases
4-11

12. Figure 4-22: Elasticity is Unit-Free
4-12

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. Figure 4-23: The Effect on Total
Expenditure of a Reduction in Price
4-14

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. Figure 4-24: Demand and Total
Expenditure
4-16

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. Figure 4-26: Price Elasticity Is
Greater in the Long Run than in the
Short Run
4-18

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. Figure 4-27: The Engel Curve for
Food
of A and B
4-20

21. Figure 4-28: Market Demand
Sometimes Depends on the
Distribution of Income
4-21

22. Figure 4-29: An Engel Curve
at the Market Level
4-22

23. Figure 4-30: Engel Curves for
Different Types of Goods
4-23

24. Income Elasticity of Demand
Income elasticity of demand measures the
degree to which consumers respond to a
change in their incomes by buying more or
less of a particular good.
η = ΔQ/Q
ΔY/Y
4-24

25. Income Elasticity of Demand
Necessities :0<η<1
Luxuries :η>1
Inferior Goods : η < 0
η = 1  straight Engel curve passing
through the origin.
4-25

26. Income Elasticity of Demand
An easier interpretation : η = Y.ΔQ
Q ΔY
When distinguishing between the Engel
curves for necessities and luxuries, one
needs to compare the slopes of the Engel
curves with the corresponding rays.
4-26

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