PAM_2000_Fall_2008_Chapter_5

# PAM_2000_Fall_2008_Chapter_5 - Title Rich Girl Artist Gwen...

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1 • Title: Rich Girl • Artist: Gwen Stefani • Economic concept: Engel curve • Representative lyrics: If I was a Rich Girl See, I'd have all the money in the world, if I was a wealthy girl No man could test me, impress me, my cash flow would never ever end PAM 200: Intermediate Microeconomics Prof. John Cawley Chapter 5: Applying Consumer Theory

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2 Where We Are Consumer Theory Individual Demand Market Demand Theory of Production Costs of Production Perfect Competition Imperfect Competition: Monopoly Monopolistic Competition Oligopoly Prices General Equilibrium Market Imperfections Factor Markets Strategy Game Theory Chapter Outline Derive demand curve through price changes Derive Engel curve through income changes Price changes have substitution and income effects Slutsky equation Giffen goods Compensated (Hicksian) demand Cost of living adjustments Deriving the labor supply curve Tax rates and labor supply
3 • Demand curve indicates how quantity demanded varies with (and only with) price • To map a demand curve: – Start with initial budget constraint and indifference curve—quantity demanded determined by point of tangency – Alter price to get new budget constraint, see where tangent to new indifference curve – that’s quantity demanded at new price – Repeat Deriving a Demand Curve Through Price Changes 4.3 5.2 12.0 2.8 12.0 6.0 4.0 26.7 0 44.5 58.9 L 1 ( p b = \$12) p b , \$ per unit L 2 ( p b = \$6) L 3 ( p b = \$4) 26.7 0 44.5 58.9 e 3 e 2 e 1 E 3 E 2 E 1 I 1 I 2 I 3 Beer, Gallons per year Beer, Gallons per year D 1 , Demand for beer Wine, Gallons per year Deriving a Demand Curve Through Price Changes

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4 • Engel curve indicates how quantity demanded varies with (and only with) income • To map an Engel curve: – Start with initial budget constraint and indifference curve—quantity demanded determined by point of tangency – Alter income to get new budget constraint, see where tangent to new indifference curve – that’s quantity demanded at new income – Repeat Deriving an Engel Curve Through Income Changes Deriving an Engel Curve Through Income Changes per year Engel curve for beer 0 2.8 4.8 7.1 49.1 38.2 26.7 Beer, Gal ons per year 0 49.1 38.2 26.7 Beer, Gal ons per year I 2 I 3 I 1 Y , Budget e 2 e 3 Y 1 = \$419 Y 2 = \$628 Y 3 = \$837 L 3 L 2 L 1 e 1 E 1 * E 2 * E 3 * Wine, Gal ons
5 Deriving Demand Curves and Engel Curves Even if everyone faced same budget constraint -- same income same prices --then their demand curves and Engel curves would still differ because their indifference curves differ Normal and Inferior Goods • Normal good: demand increases as income rises; Engel curve slopes up • Inferior good: demand falls as income rises; Engel curve slopes down • The same good may be normal and inferior at different levels of income 0 ξ> 0 ξ<

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6 Engel Curve for Normal Good Income Steak E_n Engel Curve for Inferior Good Income Ramen Noodles E_i
7 A Good That Is Both Inferior and Normal Y 2 Y 1 Y 1 Y 2 Y 3 Y 3 L 1 Y , Income L 2 L 3 e 2 e 3 e 1 E 2 E 3 E 1 I 1 I 2 I 3 Hamburger per year Hamburger per year All other goods per year

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## This note was uploaded on 05/30/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell.

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PAM_2000_Fall_2008_Chapter_5 - Title Rich Girl Artist Gwen...

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