Section5notes - Section 5 Topics 1 Demand functions a What...

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Unformatted text preview: Section 5 Topics 1. Demand functions a. What are they? b. What: do Hicksian and Marshallian demand functions tell us? 2. Demand Curves 3. Normal and Inferior Goods a. Graphical description Demand Functions Marshallian demand functions tell us how much of a good we demand given prices and income. It is important to understand that prices and income are exogenous, they are parameters over which the individual has no control. Changes in prices and income will cause the quantity of the good demanded to change. Hicksian demand functions tell us how much of a good we demand given prices and a particular level of utility. Changes in prices and utility will cause the Hicksian demand to change. Demand Curves Individual demand curves show the relationship between the price of a good and the quantity of a good purchased by an individual assuming that all other determinants of demand are held constant. Compensated demand curves show the relationship between the price of a good and the quantity purchased on the assumption that utility and other prices are held constant. This is why we call it a compensated demand curve, income is increased or decreased in order to hold the utility of the individual constant even if the price of a good changes. AL» 70”“ — _ .. 4‘ i v f (“CEN- v; 7’3?“ J ., LI) '( x " I (Mk V ' ,:‘ 1“: r, {My H M" ‘ ’* \ 7' ' . Rx 3W5 / \-x:»~\»«\\‘ «z: w». \\\ 1K Comparison of Compensated and Uncompensated Demand Curves The compensated and uncompensated demand curves intersect at p2 because x2 is demanded under each concept. For prices above p2, the individual’s income is increased with the compensated demand curve so more x is demanded than with the uncompensated curve. For prices below p2, the individual’s income is decreased with the compensated demand curve so less x is demanded than with the uncompensated curve. Nomal and Inferior Goods A good is normal if demand for the good increases as income increases. A good is inferior if demand for the good drops as income increases. dim” rim/Wat; ...
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