Lecture 11. The Theory of Demand.pdf - Price changes Income and Substitution Effects Consumer Surplus Market Demand Economics Lesson 11 Consumer theory

Lecture 11. The Theory of Demand.pdf - Price changes Income...

This preview shows page 1 - 9 out of 49 pages.

Price changes Income and Substitution Effects Consumer Surplus Market Demand Economics - Lesson 11 Consumer theory The Theory of Demand Anna D’Ambrosio Polythecnic of Turin Chapter 5,Besanko & Braeutigam, Microeconomics , 4th Edition 1 / 48
Image of page 1

Subscribe to view the full document.

Price changes Income and Substitution Effects Consumer Surplus Market Demand Demand Theory 1 Price changes 2 Income and Substitution Effects 3 Consumer Surplus 4 Market Demand 2 / 48
Image of page 2
Price changes Income and Substitution Effects Consumer Surplus Market Demand Price Changes and Individual Demand The optimal consumption bundle tells us how much of good x a consumer will demand at a given price level P x We can find more points on her demand curve by repeating the exercise for different prices of x , asking what the monthly consumption of good x will be if the price is p x 1 , p x 2 , p x 3 . In other words, a change in the price can inform us about the demand curve of a good. For each price change, we can determine how much of the good the individual would purchase given their budget lines and indifference curves 3 / 48
Image of page 3

Subscribe to view the full document.

Price changes Income and Substitution Effects Consumer Surplus Market Demand Price Changes and Individual Demand Optimal choice Individual Demand 4 / 48
Image of page 4
Price changes Income and Substitution Effects Consumer Surplus Market Demand Effect of a Price Change From the previous example: P Q $4.00 2 $2.00 10 $1 16 The curve connecting all baskets that are optimal as the price of good x changes is the price consumption curve , or price expansion path Notice that the consumer is better off (i.e. on higher indifference curves) as the price of the good falls By changing prices and showing what the consumer will purchase, we can create a demand schedule and demand curve for the individual A decrease in the price of x causes the consumer to move down and to the right ALONG the demand curve. 5 / 48
Image of page 5

Subscribe to view the full document.

Price changes Income and Substitution Effects Consumer Surplus Market Demand From Optimal Choice to Demand At every point on the demand curve, the consumer is maximizing utility by satisfying the condition that the MRS of food for clothing equals the ratio of the prices of food and clothing The demand curve can be thought as representing a consumer’s willingness to pay for an additional unit of the good: This is implicit in the MRS: At point A, MRS=1, hence a unit of food is worth 1 unit of clothing, which costs $4. Hence the consumer is willing to pay $ 4 for an additional unit of food. At point B, MRS=1/2, hence a unit of food is worth 1/2 unit of clothing, which costs $4. Hence the consumer is willing to pay $ 2 for an additional unit of food. The willingness to pay for a good decreases as the quantity consumed increases 6 / 48
Image of page 6
Price changes Income and Substitution Effects Consumer Surplus Market Demand Effect of a Price Change 7 / 48
Image of page 7

Subscribe to view the full document.

Price changes Income and Substitution Effects Consumer Surplus Market Demand Income Changes Recall that an increase in income results in an outward, parallel shift of the budget line.
Image of page 8
Image of page 9
  • Spring '12
  • Gomugda

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes