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perloff_0321374584_IM_Part1_C05 - Chapter 5 Applying...

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Chapter 5 Applying Consumer Theory ± Chapter Outline 5.1 Deriving Demand Curves 5.2 How Income Changes Shift Demand Curves A Rise in Income Shifts the Demand Curve Consumer Theory and Income Elasticities 5.3 Effects of a Price Change Income and Substitution Effects with a Normal Good Income and Substitution Effects with an Inferior Good 5.4 Cost of Living Adjustments Inflation Indexes Effects of Inflation Adjustments 5.5 Deriving Labor Supply Curves Labor-Leisure Choice Income and Substitution Effects Shape of the Labor Supply Curve Income Tax Rates and Labor Supply ± Teaching Tips This chapter contains a great deal of important material, and requires several classes to cover effectively. I find that covering the price consumption curve, Engel curve, and the derivation of demand curves usually takes me about one 70-minute period. The material is not intuitively difficult, but students need to be clear about these concepts in order to have the substitution and income effect material make sense. You may want to spread the presentation of the substitution and income effects over more than one period, because students will benefit from having some time to process the first run through, as well as refer back to the book. When presenting the substitution and income effects, try to set up the presentation such that the class can take good quality notes on the graphs. When students come in for help on this material, you might go through their notes with them. What you are likely to discover is that hurriedly drawn indifference curves and freehand wobbly budget constraints have led to a graph that looks almost nothing like the one you put on the board. They may have the imaginary budget line drawn so that it intersects the original point of tangency, which leaves them with no substitution effect. To minimize this problem, in addition to reminding them to bring in a protractor and colored pencils with which to take notes, I do the following: The first time I demonstrate the separation of the total effect into the two component effects, I replicate an example that is in the text (such as the beer and wine example in Figure 5.5). I tell the class that I am doing this, but ask them to take notes as they normally would rather than just watch me and look at the book. This way, if they make errors in note taking, they can refer to the text to see the correct graph. The other thing that can be
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34 Part 1 Teaching Aids helpful is to supply them with pre-drawn indifference curves, as this is where most of the trouble occurs. For example, if they draw their curves much differently than yours when you are demonstrating the separation of income and substitution effects for an inferior good, theirs may not turn out to be inferior. Another possibility is to give the class coordinates of points that make up the needed indifference curves.
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perloff_0321374584_IM_Part1_C05 - Chapter 5 Applying...

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