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Aggregate Demand

Aggregate Demand. How do we get aggregate demand from individual demands? Two people with demands xA(p1,p2,m) and xB(p1,p2,m). Aggregate demand X=xA+xB. What does this look like with demand curves? Horizontal or Vertical addition?. Information Technology .

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Aggregate Demand

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  1. Aggregate Demand • How do we get aggregate demand from individual demands? • Two people with demands xA(p1,p2,m) and xB(p1,p2,m). • Aggregate demand X=xA+xB. • What does this look like with demand curves? Horizontal or Vertical addition?

  2. Information Technology • Phones, Faxes, e-mail, etc. all have the following property: • Network externalities: The more people using it the more benefit it is to each user. • Computers, VCRs, PS2s, also have this property in that both software can be traded among users and the larger the user market, the larger number of software titles are made. • How do markets operate with such externalities?

  3. Competition & Network Externalities • Individuals 1,…,1000 (call this number v) • Each can buy one unit of a good providing a network externality. • Person v values a unit of the good at nv, where n is the number of persons who buy the good.

  4. Competition & Network Externalities • What is the demand at price p? • If v is the marginal buyer, valuing the good at nv = p, then all buyers v’ > v value the good more, and so buy it. • Quantity demanded is n = 1000 - v. • So inverse demand is p = n(1000-n). • Graph this! • What is the supply curve if marginal cost c<250,000?

  5. Competition & Network Externalities • What are the market equilibria? • Zero. • A large numbers of buyers buy. • large n*  large network externality value n*v • good is bought only by buyers with n*v  c; i.e. only large v  v* = c/n*. • The other point is unstable and called a threshold point. Below this, demand will go to zero. Above this, the product would be a hit.

  6. Discussion points • Competitors: Sony vs. Beta, Qwerty vs. Dvorak, Windows vs. Mac, Playstation vs. Xbox. • Does the best always win?

  7. Demand Review • What is aggregate demand if • XA=10-p. • XB=20-p. • What about if they only consume positive amounts of a good? • XA=Max{10-p,0}. • XB=Max{20-p,0}.

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