# ch05 - Chapter 5 The Theory of Demand 1 The price...

This preview shows pages 1–16. Sign up to view the full content.

1 Chapter 5:  The Theory of Demand Chapter 5:  The Theory of Demand

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 The       is the set  of optimal baskets for every possible price of good x,  holding all other prices and income constant. price consumption curve   of good x
3 Y (units) X (units) 0 P X = 4 X A =2 X B =10 10 P Y = \$4 I = \$40 Example:   The Price Consumption Curve

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
4 Y (units) X (units) 0 P X = 4 P X = 2 X A =2 X B =10 10 P Y = \$4 I = \$40 20 Example:   The Price Consumption Curve
5 Y (units) X (units) 0 P X = 4 P X = 2 P X = 1 X A =2 X B =10 X C =16 10 P Y = \$4 I = \$40 Price consumption curve 20 The price consumption curve for good x  can be written as the quantity consumed of  good x for any price of x.  This is the  individual’s demand curve for good x. Example:   The Price Consumption Curve

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
6 Example:   Individual Demand Curve for X X P X X A X B X C Individual Demand Curve For X P X = 4 P X = 2 P X = 1 U increasing
7 The consumer is maximizing utility at every point  along the demand curve The marginal rate of substitution falls along the  demand curve as the price of x falls (if there was an  interior solution). As the price of x falls, utility increases along the  demand curve.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
8 Example:  Suppose U = x + y.  Income, I, is spent  only on x and y.  Prices are p   x  and p   y . When p x  < p y , the price consumption curve is  I/p x = x.   When p x  > p y , the price consumption curve is I/p y  = y*.   Between, it is x + y = I
9 Example:   The Price Consumption Curve X (units) Y*=I/P Y P X >P Y 0 Y (units)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10 10 Example:   The Price Consumption Curve X (units) Y*=I/P Y P X >P Y P X =P Y P X <P Y 0 Y (units)
11 11 Example:   The Price Consumption Curve X (units) Y*=I/P Y P X >P Y P X =P Y P X <P Y IC 1 IC 2 IC 3 0 Y (units)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
12 12 The corresponding demand  for x is:    X = I/p x    when p x  < p y          I – y when p x  = p y  when p x  > p y X P X 0 P Y I/P Y -Y I/P X Demand curve for X
13 13 Algebraically, we can solve for the individual’s demand  using the following equations: 1.  p x x + p y y = I 2.  MU x /p x  = MU y /p y  … at a tangency. (If this never holds, a corner point may be substituted  where x = 0 or y = 0)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
14 14 Example: Finding a Demand Curve with an Interior Solution Suppose that U(x,y) = xy.  MU x  = y and MU y  = x. The prices  of x and y are p x  and p y , respectively and income = I. We have: 1.  p x x + p y y = I               2.  x/p y  = y/p x Substituting the second condition into the     budget  constraint, we have:  p x x + p y (p x /p y )x = I    or…x = I/2p x
15 15 Suppose U = xy + 10x.  MU x =y + 10 and MU y  = x.  All the  other notation is as in the last example.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern