Lec 4 Demand Analysis

# Lec 4 Demand Analysis - 1 Demand analysis When the world...

This preview shows pages 1–7. Sign up to view the full content.

1 Demand analysis When the world price of oil increases, should the government reduce gas taxes to keep the retail price of gas the same or should the government give a lump sum tax credit to consumers? Individual demand: 1. Income e/ects 2. Substitution e/ects 3. Total e/ect of price change Market demand: 1. Derive from individual demand 2. Price elasticity and changes in expenditure 3. Consumer surplus

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 Max U ( F;C ) subject to: P C C + P F F I 3 Income e/ect ± Normal versus inferior good ± Engel curve
4 Substitution e/ect of price change Minimize cost when price changes subject to utility held constant. What is the change in quantity when relative prices change? Why do you care about substitution e/ect? Com- paring cost of living. Buy more of good that is relatively cheaper. Buy less of good that is relatively more expensive.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
5 Total quantity change due to price change Total price change decomposes into (1) Income and (2) Substitution e/ect. Assume price of C increases. 1. Income e/ect can be negative or positive. 2. Substitution e/ect is negative. E/ect of subsidizing electricity prices versus tax re- bate for consumers when cost of producing electricity rises.
6 Market demand Market demand is horizontal sum of individual de- mand. Demand elasticity and expenditure: E = PQ E P Q + Q P E P = P Q P + Q E P = Q ( P Q Q P + 1) E P = Q ( " P + 1) " P is inelastic, E P is positive. " P is unitary, E P is zero. " P is elastic, E P is nega- tive.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
7 Consumer surplus We want a measure of change in consumer welfare as price of commodity changes. Consumer surplus measures the di/erence between
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 21

Lec 4 Demand Analysis - 1 Demand analysis When the world...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online