Economics 11 - Chapter 5 Reading Notes

Economics 11 - Chapter 5 Reading Notes - Economics 11 -...

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Economics 11 - Chapter 5 Reading Notes  (Income and Substitution Effects) Demand Functions Homogeneity o Individual demand functions are homogeneous of degree zero in all prices  and incomes Doubling all prices and incomes don’t change the “real” quantity of  goods demanded P(x)x + p(y)y = Income is the same constraint as 2p(x)x + 2p(y)y = 2  (income) Changes in income Changes in a good’s price Changing the price involves changing the intercepts of the budget constraint and the  slope When a price changes, there are two effects  o Substitution effect  o Income Effect The Individual’s demand Curve An individual demand curve shows the relationship between the price of a good and  the quantity of that good purchased by an individual assuming that all other  determinants of demand are held constant.  Factors held constant in deriving demand curve:
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Economics 11 - Chapter 5 Reading Notes - Economics 11 -...

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