Understanding Market Demand Elasticity and Aggregation in the Long Run

1. 3.6 Market demand • Do we sum all DL (horizontally) ? • Problem of aggregation • The price of the product is constant for firms but ΔPC in the market  Why? • Suppose a general fall of W: • Firm: L and Y up, but this cannot affect PC • But, ALL firms are increasing L and Y  ΔPC • ES  ΔPC (fall) affecting DL (fall) • Thus, DL-Mkt is less elastic than ∑i DLi • For monopolists we have DL-Mkt = ∑i DLi Why?

2. Demand in the LR and market demand Summing up: DL* is more elastic than DL scale effect &substitution Assume a ∆W, the scale effect is the ∆L as a result of ∆Y (due to ∆ costs of production); the substitution effect is the ∆L as a result of ∆RP DL-Mkt is less elastic than ∑i DLi  a general fall of W induces all firms to increase ∆L, ∆Y  P falls and firms incorporate this new piece of information into their decision process