LL5 DEMAND AND ENGELS CURVES

# LL5 DEMAND AND ENGELS CURVES - ECON 306 CLASS HANDOUT THE...

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© Charles R. Hulten 2008 ECON 306 CLASS HANDOUT THE DEMAND AND ENGELS CURVES OUTLINE DERIVATION OF DEMAND CURVE FROM UTILITY MAXIMIZATION THEORY COMPLEMENTS AND SUBSTITUTES AND THE CROSS PRICE ELASTICITY OF DEMAND ENGELS CURVES LUXURIES, NECESSITIES, AND INFERIOR GOODS OTHER THINGS AFFECTING DEMAND THE DEMAND CURVE – KEY POINTS THE DEMAND CURVE IS THE UTILITY-MAXIMIZING QUANTITY OF A GOOD AT EACH LEVEL OF ITS PRICE, HOLDING THE PRICE OF THE OTHER GOOD AND INCOME CONSTANT THE DEMAND CURVE OF THE OTHER GOOD Y SHIFTS EVEN THOUGH ITS OWN PRICE DOES NOT CHANGE WHEN THAT CURVE SHIFTS TO THE RIGHT THE GOODS X AND Y ARE SUBSTITUTES THE DEGREE OF SUBSTITUTABILITY IS MEASURED BY THE CROSS PRICE ELASTICITY

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© Charles R. Hulten 2008 Y X e 2 e 1 B 2 B 1 60 30 10 70 100 100 e 2 e 1 40 10 70 10 P X X e 2 e 1 30 60 10 P Y Y 25 40 m % ) P = 120% % ) X = -150% ELAS = 1.25 ARC OWN PRICE X ELASTICITY OF DEMAND % ) P = 120% % ) Y = 67% ELAS = 0.555 ARC CROSS PRICE ELASTICITY OF DEMAND
© Charles R. Hulten 2008 0 10 3 5 4 5 e X 1 U 1 B 1 e 2 B 2

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## This note was uploaded on 04/12/2009 for the course ECON 306 taught by Professor Cramton during the Spring '06 term at Maryland.

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LL5 DEMAND AND ENGELS CURVES - ECON 306 CLASS HANDOUT THE...

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