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Chapter 15 37
Chapter 15
Market Demand
It would be logical to proceed directly to discussing the theory of the firm, but
I wanted to take a break from pure optimization analysis, and discuss instead
some ideas from equilibrium analysis. I think that this switch of gears helps
students to see where they are going and why all this stuff is useful.
The most important idea in this chapter is elasticity. Elasticity was introduced
earlier in Chapter 6, but I never did anything much with it there. Here we can
really put it through its paces. The calculations here are all pretty standard, but
I’m more careful than usual to distinguish between elasticity and the absolute
value of elasticity.
If you use calculus, make sure that you compute elasticities for the linear and
log-linear cases.
I love the Laffer curve example in the appendix. Here are some totally trivial
elasticity calculations that give a major insight into a big policy issue. I really
push on this example in class to show people how what they have learned can
really help in making informed judgments about policy.
Market Demand
A. To get market demand, just add up individual demands.
1. add horizontally
B. Often think of market behaving like a single individual.
C. Inverse of aggregate demand curve measures the MRS for each individual.
D. Reservation price model
1. appropriate when one good comes in large discrete units
