Suppose the initial price of good X (P x) is OP. Below are the demand curves for a public good in a two person economy. b) Suppose the good is purely public, for example a street lights installed in the neighbor-hood. 1.4(d), the market demand curve for the product is obtained. Now join these points by a curve in Fig. exactly the came market demand curve: P = 10 :5Q M where Q M is the total quantity demanded at each price. FIGURE.1 Derivation of the Demand Curve: Normal Goods. 1.4(d), this curve has been obtained to be DD. Therefore, when incomes of the people increase, they can afford to buy more. Notice that the market demand curve has the same vertical intercept as individual demands, has half of the slope and twice the horizontal intercept. The consumer buys OX units of good X. Map out the market demand curve for this public good, and determine the optimal amount of production. Lets look at an example, firstly for a private good. The upper panel of Figure.1 shows price effect where good X is a normal good. AB is the initial price line. summing horizontally the individual demand curves for the public good. In drawing the demand schedule or the demand curve for a good we take income of the people as given and constant. A. e is the initial optimal consumption combination on indifference curve U. combining the amounts of the public good that the individual members of society demand at each price. When as a result of the rise in the income of the people, the demand increases, the whole of the demand curve shifts upward and vice versa. To see more clearly that the demand curve for a public good represents a vertical summation of individual demand curves, let us generate an aggregate demand curve from two individual consumers with straight-lined demand curves. multiplying the per-unit cost of the public good by the quantity made available. Assume there is a private good, and an economy with three consumers, A, B and C. Their respective demand functions are: , , . It is obvious from the method of obtaining the market demand curve that the market demand curve for a good is the horizontal summation of its individual demand curves. In this case, individual consumers will all consume the same amount of the good, but each may value that public good at a different price or valuation. In Fig. The social demand curve (or willingness to pay curve) for a public good is found by vertically summing the individuals’ demand curves. A demand curve for a public good is determined by: summing vertically the individual demand curves for the public good. So in the public goods case, everyone consumes the same quantity, but each has different prices or valuations for the public good. Graphically, non-rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good. The greater income means the greater purchasing power. The generation of a market demand curve for a private good is now completed. In contrast, the market demand curve for a public good is the vertical sum of the individual demand curves. This is in contrast to the procedure for deriving the aggregate demand for a private good, where individual demands are summed horizontally. Public goods – continuous.
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