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Unformatted text preview: Chapter 6 Demand The demand function gives the optimal amounts of each of the goods as a function of the prices and income faced by the consumer: x 1 (p 1 , p 2 , m) We now change the arguments in the demand function one by one. x 1 /m > 0: good 1 is a normal good x 1 /m < 0: inferior (depends on the income level we are talking about: bus, MRT, taxi) Two ways to look at the same thing (1) At x 1 x 2 space, connect the demanded bundles as the budget line gets shifted outward. This curve is called the income offer curve (IOC) or income expansion path. (2) At x 1 m space, connect the optimal x 1 bundles as the income increases while holding all prices fixed. This curve is called the Engel curve. Draw a general preference to illustrate the income offer curve and the Engel curve. Perfect substitutes: p 1 < p 2 , IOC (x axis), Engel (sloped p 1 ) think about p 1 > p 2 and p 1 = p 2 ....
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This note was uploaded on 02/19/2010 for the course ECON 1313212 taught by Professor John during the Spring '09 term at The School of the Art Institute of Chicago.
 Spring '09
 John

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