Econ306 Chapter 4

Econ306 Chapter 4 - Econ306 Chapter 4 Price consumption...

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Econ306 Chapter 4 Price consumption curve: traces the utility maximizing combinations of two goods as the price of one changes Increase in consumption of a good in response to a decrease in price almost always holds Change in the price of a good corresponds to a movement along the demand curve Individual demand curve: relates the quantity of a good that a single consumer will buy to its price o The level of utility that can be attained changes as we move along the curve. The lower price of the product, the higher the level of utility. A higher indifference curve is reached as the price falls. o At every point on the demand curve, the consumer is maximizing utility by satisfying the condition that the marginal rate of substitution (MRS) of food for clothing equals the ratio of the prices of food and clothing Income consumption curve: traces of the utility maximizing combinations of two goods as a consumers income changes Any change in income must lead to a shift in the demand curve itself Upward sloping income consumption curve implies that an increase in income causes a shift to the right in the demand curve Income consumption curve has a positive slope, the quantity demanded increases with income; income elasticity of demand is positive Normal: consumers want to buy more of them as their incomes increase Inferior: consumption falls when income rises
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This note was uploaded on 11/16/2010 for the course ECON 306 taught by Professor Cramton during the Spring '06 term at Maryland.

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Econ306 Chapter 4 - Econ306 Chapter 4 Price consumption...

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