Chapter_5_Applying_Consumer_Theory

Chapter_5_Applying_Consumer_Theory - Chapter 5 Applying...

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Chapter 5 Applying Consumer Theory Key questions: 1. Where does the demand curve come from? 2. Why is the demand curve normally downward sloping?
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1.Deriving an Individual’s Demand Curve Figure 5.1 2.Effects of Rise in Income An Engel curve shows the relationship between the quantity demanded of a single good and income, holding prices constant Figure 5.2 Income elasticity of demand = Y Y Q Q d d / / Normal good : income elasticity of demand 0 Inferior good : income elasticity of demand < 0 Typically, necessities (e.g., food) have income elasticities near zero. Luxuries generally have income elasticities greater than one.
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3. Effects of Own-Price Change Figure 5.5 A decrease in the price of a good, holding other prices and income constant, has two effects on an individual’s demand: Substitution effect NOTE: Utility is held constant. If the price of the good decreases, consumers substitute this good for other relatively more expensive goods.
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Income effect NOTE: Prices are held constant. A
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Chapter_5_Applying_Consumer_Theory - Chapter 5 Applying...

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