Demand curve

Having selected a type and height of pack, the above equation can be plotted to intersect with the required demand curve to obtain the L/G. With the L/G and the given amount of water to be cooled, the air requirement can be calculated for ... 

Now let us refer to the right-hand side of the above expression. The mean driving force varies with the specified design temperatures and also the ratio of water/air loading (L/G). If we take a low airflow, the air soon rises in temperature and tends to reach equilibrium conditions with the boundary layer. Thus the driving force is reduced. On the other hand, excess air is unnecessary. Therefore, one must adjust the airflow that supply just meets demand. A plot of L/G versus AT MDF is shown in Figure 34.17. This is known as a demand curve. 

Thus, there is an optimum depth of packing for each individual duty and, in practice, it is usually found that an intersection near the knuckle on the demand curve produces the most economic selection. 

In order to estimate the welfare loss we must be able to quote a monopoly price (p1 in Figure 2.1) and also an estimate of the price as it would have stood had the sector been competitive (p2 in Figure 2.1). We also need an estimate of the demand curve in order to know what quantity consumers would buy at each price, q1 when the price is px and q2 when it is p2. A monopoly situation involves a shift from B to point A, which causes a welfare loss equivalent to triangle ABC. 

A formal comparison between a system of grants or rewards and that of patents was presented recently by Shavell and Ypersele.22 In their article they present a review of the two systems and the theoretical positions of each of them. They state that under the system of grants, insofar as there would be no welfare loss as a result of monopoly prices, the only deviation from optimal allocation would be in relation to the incentive to invest in research. This incentive can be ambivalent. If the social or aggregate surplus is greater than the reward or grant there will be insufficient incentives, and vice versa. Either of these two possibilities may occur, as the optimal reward is equal to the expected surplus under different demand curves. 

Shavell and Ypersele focus on a model in which there is a potential innovator who knows the demand curve before investing in research, whereas the government only knows the probability distribution of the demand curves. Although this is a restrictive model, they go on to develop the case for which the government observes the quantity sold ex post, and establish inferences on how the grants could be formulated. 

In short, the imperfections of the pharmaceutical market cause (a) less price sensitivity on the demand side, (b) a certain amount of market power on the supply side, and (c) demand curves that do not reflect the true social benefit. Demand for pharmaceuticals is greater and less price-elastic than it should be. The reason for this is that consumers have little price sensitivity, especially under insurance coverage. 

Danzon and Liu22 show that the short-term effect of RP is to produce a kink in the demand curve at the point corresponding to the RP, assuming that all doctors have perfect information on prices. The kinked demand model put forward by these authors to explain the behaviour of prices subject to RP predicts that it will never be optimal to fix a price below RP, the optimal pricing response being EFP = RP (see box above). 

The price of a prodnct is obvionsly a major determinant of the demand for it by customers. The demand for the product then establishes the scale of production, i.e. the supply of the product. The relationship between the price of a product, the amount of product that a manufacturing company can profitably sell, and the amounts of product that will be bought by customers can be sununarised by means of supply and demand curves (Figure 13.9). A supply curve gives the relationship... 

This curve, similarly, is the sum of many individual demand curves for hogs. 

With different slopes of the supj y and demand curves, the movement would have been an inward spiral converting to the equilibrium. 

The meaning of equilibrium in the social sciences is a state in which people s plans are consistent with each other. Usually, but not invariably, this also ensures that unintended consequences will not occur. In Fig. X.2, equilibrium is where the supply and demand curves cross. If hog farmers expect the equilibrium price to obtain next year, they will make decisions (about how much to produce) which cause that price to be realized. 

In the cobweb cycle, as drawn in Fig. X.2, the equilibrium is unstable. Any small perturbation will set up an ever-widening cycle. By the same token, if the farmers begin out of equilibrium, they will never come near it. If we draw the diagram differently, with the supply curve steeper than the demand curve, the opposite is true. After a while, the farmers converge to the equilibrium and return to it after any accidental perturbation. A preliminary conclusion might be that the realization of an equilibrium depends on details of the interaction. Some deviations from equilibrium correct themselves, while others get out of hand. 

As a profit maximizing monopolist, you face the demand curve Q = a + (3P + e. In the past, you have set the following prices and sold the accompanying quantities ... 

Using a well known result, for a linear demand curve, marginal revenue is MR = (-a/ ) + (2/p)q. The profit maximizing output is that at which marginal revenue equals marginal cost, or 10. Equating MR to 10 and solving for q produces q = a/2 + 5p, so we require a confidence interval for this combination of the parameters. 

Fig. 1.6 National electricity demand curve. In the winter the curve moves up the y-axis. In the UK, the winter demand is roughly double that of summer...

For a monopolist (N = 1) facing a constant elasticity demand curve, the cost pass-through rule is thus e / (e + 1), which corresponds to that found by Bulow and Pfleiderer (1983). Note that because e < -1 for a monopolist, isoelastic demand therefore implies cost pass-through of more than 100% of any price change, and the pass-through would decline towards 100% for more competitive markets. 

A simple theoretical model will help us understand how the two allocation methods differ. Let us take a set of N homogeneous firms competing under Cournot competition with a linear demand curve on the goods market. These firms choose an output and an abatement level in order to maximize their profit ... 

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