Ch04_Pindyckfinal

# Ch04_Pindyckfinal - Chapter 4 Individual and Market Demand...

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Chapter 4 Individual and Market Demand

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Chapter 4 2 Topics to be Discussed Individual Demand Income and Substitution Effects Market Demand Consumer Surplus Network Externalities Empirical Estimation of Demand
Chapter 4 3 Effect of a Price Change Each price leads to different amounts of food purchased 5 U 3 D 4 U 2 B 12 20 Assume: I = \$20 P C = \$2 P F = \$2, \$1, \$0.50 Food (units per month) Clothing 6 A U 1 4 10

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Chapter 4 4 Effect of a Price Change The Price- Consumption Curve traces out the utility maximizing market basket for each price of food 4 U 2 B 12 20 5 U 3 D Food (units per month) Clothing 6 A U 1 4 10
Chapter 4 5 Effect of a Price Change By changing prices and showing what the consumer will purchase, we can create a demand schedule and demand curve for the individual From the previous example: Demand Schedule (Food) P Q \$2.00 4 \$1.00 12 \$0.50 20

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Chapter 4 6 Effect of a Price Change Demand Curve Individual Demand relates the quantity of a good that a consumer will buy to the price of that good. Food (units per month) Price of Food H E G \$2.00 4 12 20 \$1.00 \$.50
Chapter 4 7 Demand Curves – Important Properties The level of utility that can be attained changes as we move along the curve 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

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Chapter 4 8 Effect of a Price Change Food (units per month) Price of Food H E G \$2.00 4 12 20 \$1.00 \$.50 Demand Curve E : P f /P c = 2/2 = 1 = MRS G: P f /P c = 1/2 = . 5 = MRS H:P f /P c = .5/2 = .25 = MRS When the price falls, P f /P c & MRS also fall
Chapter 4 9 Effects of Income Changes Food (units per month) Clothing (units per month) An increase in income, with the prices fixed, causes consumers to alter their choice of market basket. 3 4 A U 1 5 10 B U 2 D 7 16 U 3 Assume: P f = \$1, P c = \$2 I = \$10, \$20, \$30

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Chapter 4 10 Individual Demand Income Changes The income-consumption curve traces out the utility-maximizing combinations of food and clothing associated with every income level An increase in income shifts the budget line to the right, increasing consumption along the income-consumption curve Simultaneously, the increase in income shifts the demand curve to the right
Chapter 4 11 Effects of Income Changes Food (units per month) Clothing (units per month) The Income Consumption Curve traces out the utility maximizing market basket for each income level 3 4 A U 1 5 10 B U 2 D 7 16 U 3 Income Consumption  Curve

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12 Effects of Income Changes Food (units per month) Price of food An increase in income, from \$10 to \$20 to \$30, with the prices fixed, shifts the consumer’s demand curve to the right as well. \$1.00
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## This document was uploaded on 11/29/2009.

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Ch04_Pindyckfinal - Chapter 4 Individual and Market Demand...

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