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Chapter 4
Demand
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Chapter Outline
4.1
Deriving Demand Curves
System of Demand Equations
Graphical Interpretation
4.2
Effects of an Increase in Income
How Income Changes Shift Demand Curves
Consumer Theory and Income Elasticities
4.3
Effects of a Price Increase
Income and Substitution Effects with a Normal Good
Income and Substitution Effects with an Inferior Good
Compensated Demand Curve
Slutsky Equation
4.4
CostofLiving Adjustments
Inflation Indexes
Effects of Inflation Adjustments
4.5
Revealed Preferences
Recovering Preferences
Substitution Effect
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Teaching Tips
This chapter contains a great deal of important material, and requires several classes to cover effectively.
Covering the price consumption curve, Engel curve, and the derivation of demand curves usually takes
about one 70minute period. The material is not intuitively difficult, but students need to be clear about
these concepts in order to have the substitution and income effect material make sense. You may want to
spread the presentation of the substitution and income effects over more than one period, because students
will benefit from having some time to process the first run through, as well as refer back to the book.
When presenting the substitution and income effects, try to set up the presentation such that the class can
take good quality notes on the graphs. When students come in for help on this material, you might go through
their notes with them. What you are likely to discover is that hurriedly drawn indifference curves and
freehand wobbly budget constraints have led to a graph that looks almost nothing like the one you put
on the board. They may have the imaginary budget line drawn so that it intersects the original point of
tangency, which leaves them with no substitution effect. To minimize this problem, in addition to reminding
them to bring in a protractor and colored pencils with which to take notes, do the following: The first time
demonstrate the separation of the total effect into the two component effects, replicate an example that is in
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Perloff •
Microeconomics: Theory and Applications with Calculus
the text (such as the CDs and DVDs example in Figure 4.5). Tell the class that you are doing this, but ask
them to take notes as they normally would rather than just watch me and look at the book. This way, if they
make errors in note taking, they can refer to the text to see the correct graph. The other thing that can be
helpful is to supply them with predrawn indifference curves, as this is where most of the trouble occurs.
For example, if they draw their curves much differently than yours when you are demonstrating the
separation of income and substitution effects for an inferior good, theirs may not turn out to be inferior.
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 Spring '08
 CONSTANTINE

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