Aggregate demand for a market
For a price it tells
givenmuch will
you how all
in
a
consumers
market participating
demand
Ex Suppose there are 100
consumers with the
following utility
UK y xky
and each has income I
We know the individual
demand for Dc is
Ot
Eg
gentndividual demand
is
To find market or aggregate
demand
a write x as a function
of Poc
ii Add over all consumers
É
stop 58
What NOT to do
Pe Ic
B
ex EEE EE
EE
Ex Perfect substitutes
U x M 2x
ty
x't Ee if I g
EI if E g
o if
Ekg
There are 20 identical
consumers
if
Ex I
D Ey
a
if
O if Edy
Or
he
say
Fai
ES
to Poc 2py
Aggregate or market supply
For
price what
the given
a
is
all production of
in
firms
the participating
market
Example
Px 222
There are 45 firms in
this market with identical
production functions To
find aggregate supply
1 Solve for Oc
I
peg
ii Add the quantities for all firms
X
a
É 1
30 432
The aggregate supply is
PA
TEX
Supply forto a constant
returns scale product
function
TC ax
AT
ex ax
Hea
if Goo a
ocs
É as if pea
O if pea
suppose there are 15 firms
that produce oc
as if poe a
Xs Zoos
o e if pea
O if Paca
Pa
fast
5
Market
equilibrium
Price and quantity in which
demand equals supply
ÉE
I
Ggg
Ex Market demand
XP
10K
Y 2 x
Xs
X
it
E i
e
s
We take X and X such
that XD Xs
1
2pac
PEE TE Fo
Keg__2550
Shifters for supply O
to Increase in input prices
left
7 Number of sellers decrease
left
e
Change in
technology
shifters for demand
Change in priceof other goods
Change in
in
income
Change preferences
IE and SE after changes
in the market
Pa
iI
Aggregate change in quantity
X yea
Individual change total effect
TE TimEEnsumers
Note that this is equivalent
to a change
fromanalysing to price
pe pee
SE Mlp pg 48 2
6 p D
once [Link] fonsumers
IE TE SE
Exercises
that there are
suppose
10 consumers with the
following utility function
tnx
Mkay try
I 1000
pry 1
There are 20 firms
with fixed proportions
a
production function
FCK L min 2K L
Prices for inputs are
Pk 2 and 91 4
Find the equilibrium price
and quantity in the market
for Dc
a Find individual demand
MRS
Pg
x
q
Plug budget constraint
I
4 yes
g
y Iggy if I
spy
I 1000 and l
py
99970
9
g Fa
i Market demand
XD Éx
iii Individual Supply
a LRTC
L 2K x
1 Dc KD
TCH c
PK
Pa
40C t c
5 x
b IT X 5C
Gc
as if pa 5
as 0 as if px 5
O if Po
v Market
supply
as
if poc 75
Xs
to as if Poo 5
O if Px 5
9Th
[Link]
XD
To find equilibrium quantity
PE J in the demand
plug
yea 2
106
Suppose the
in
firms
the
now
short
operate
run and labor is
fixed at 5 units What
is the Kee and peg
ii New individual supply
f K L min 2K L
since
55 X 25
SRTC E
GET PKI
K
E
S RTC 20 X
PT Gc X X 20
x ex d 20
5 if pa 1
I
0,5 if px
O if Poc 1
Xs
i
I
e
as 2030s
x O roo
if pal
94
X
xs
p I
a
i
g
There after'Éandidates
for equilibrium
1 45 100
a
peep
For i we know
that
XD 1
If Xs 100 is the
equilibrium
000
69
ex tea
since
focal this doesn't
match the
supply so
4 100 is not an ee
ii peg p
XD 4 10
IE and SE
in from
Change price
98 5 to pooka
To find SE we use
Hicksian at the initial
and
utility new
prices
och 942 a
SE och poi pyo 9 27
1 E
SE TE
IE 0