Micro-Ch4 - Chapter 4: Individual and Market Demand Extends...

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Chapter 4: Individual and Market Demand Extends individual theory of consumer demand Start with individual’s budget constraint/indifference curve analysis to show how quantity of good changes as price changes. Steps: 1. Start at single U-max. – 2. Show es in P F es in Q F 3. Price-Consumption Curve 4. Individual Demand Curve 5. See Figure 4.1.
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Individual’s Demand Curve: 2 Properties 1. As move down D curve, level of attainable utility increases because a P implies an in purchasing power. *Utility es as move down D Curve. • 2. As move down D curve and P F is , MRS is falling too. Why? Each pt on D curve comes from U max, where MRS=-P F /P C ; so when P F falls, MRS falls too. • Explain using MRS = MU F /MU C .
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Effect of Income on Quantity of Food Goal: Link es in income to shifts in the Demand Curve. Steps: 1. Start at single U-max. – 2. Show es in I es in Q F 3. Income-Consumption Curve 4. Shifts in Individual D Curve 5. See Figure 4.2.
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Review Link Between Income and Q F Key: Income-Consumption Curve shows points on different demand curves. If have : I associated with D curve shifting to right for the two goods on both axes Income-Consumption Curve slopes upward AND the goods are normal goods and income elasticity of demand is positive.
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More on Income and Consumption Inferior Good : Income consumption . In this case, if this inferior good on vertical axis: Income-Consumption curve slopes downward. Income-Consumption curve can be backward-bending (See Figure 4.3.) Engel Curve : shows relationship between income and consumption for a specific good. (See Figure 4.4.) This curve can also be backward-bending.
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Substitutes versus Complements • If P A D B , then the two goods are substitutes . – Review:
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This note was uploaded on 10/05/2010 for the course ECON 104A taught by Professor Thomas during the Spring '10 term at UC Riverside.

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Micro-Ch4 - Chapter 4: Individual and Market Demand Extends...

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