Ec100A Ch4 - 4 INDIVIDUAL AND MARKET DEMAND Econ 100A...

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INDIVIDUAL AND MARKET DEMAND 4 Econ 100A Mortimer
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INDIVIDUAL DEMAND Price Changes A reduction in the price of food, with income and the price of clothing fixed, causes this consumer to choose a different market basket. In (a) , the baskets that maximize utility for various prices of food (point A , $2; B , $1; D , $0.50) trace out the price-consumption curve. Part (b) gives the demand curve, which relates the price of food to the quantity demanded. (Points E, G, and H correspond to points A, B, and D, respectively). Econ 100A Mortimer
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INDIVIDUAL DEMAND The Individual Demand Curve price-consumption curve Curve tracing the utility-maximizing combinations of two goods as the price of one changes. individual demand curve Curve relating the quantity of a good that a single consumer will buy to its price . We are keeping everything else (e.g., income, taste) fixed when we derive these two curves . Econ 100A Mortimer
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INDIVIDUAL DEMAND Algebraic Approach: Individual Demand Curve Q: Assume a consumer has the utility function U(C, F)=CF, where C denotes the amount of clothing and F the amount of food. Her marginal utilities are MU C = F and MU F = C. The price of clothing is P C and the price of food is P F , and income is I. Show that the demand curve for food is F=I/(2P F ). Solution: We know that an optimal basket will be on the budget line: P F F+P C C=I. Furthermore, at the optimum, MRS=MU F /MU C =C/F=P F /P C. Thus, C=(P F /P C )F. We can solve for F by substituting C=(P F /P C )F into the budget line equation P F F+P C C=I. This gives us: P F F+P C {(P F /P C )F} = I. 2P F F=I. We get F=I/(2P F ). Econ 100A Mortimer
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INDIVIDUAL DEMAND Income Changes An increase in income, with the prices of all goods fixed, causes consumers to alter their choice of market baskets. In part (a) , the baskets that maximize consumer satisfaction for various incomes (point A , $10; B , $20; D , $30) trace out the income- consumption curve. The shift to the right of the demand curve in response to the increases in income is shown in part (b) . (Points E , G , and H correspond to points A , B , and D , respectively.) Econ 100A Mortimer
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INDIVIDUAL DEMAND Normal versus Inferior Goods An Inferior Good Although many goods are consumed more when a person’s income increases, a higher income can also lead to lower consumption. Here, hamburger, though a normal good between A and B , becomes an inferior good when the income-consumption curve bends backward between B and C . Income elasticity of inferior goods is negative Econ 100A Mortimer
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INDIVIDUAL DEMAND Engel Curves Engel curves relate the quantity of a good consumed to income . In
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Ec100A Ch4 - 4 INDIVIDUAL AND MARKET DEMAND Econ 100A...

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