ch05 ppt notes

# ch05 ppt notes - Chapter Five The Theory Of Demand Chapter...

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1 The Theory Of Demand Chapter Five Chapter Five

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2 Chapter Five Overview 1. Individual Demand Curves 1. Income and Substitution Effects & the Slope of Demand Applications: The Work-Leisure Trade-off Consumer Surplus 1. Constructing Aggregate Demand Chapter Five
3 Is the set of optimal baskets for every possible price of good x, holding all other prices and income constant. The Price Consumption Curve of Good X: Chapter Five Individual Demand Curves

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4 Y (units) X (units) 0 P X = 4 P X = 2 P X = 1 X A =2 X B =10 X C =16 10 P Y = \$4 I = \$40 Price Consumption Curve 20 The price consumption curve for good x can be written as the quantity consumed of good x for any price of x. This is the individual’s demand curve for good x. Chapter Five Price Consumption Curves
5 X P X X A X B X C Individual Demand Curve For X P X = 4 P X = 2 P X = 1 U increasing Chapter Five Individual Demand Curve

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6 The consumer is maximizing utility at every point along the demand curve The marginal rate of substitution falls along the demand curve as the price of x falls (if there was an interior solution). As the price of x falls, utility increases along the demand curve. Chapter Five Individual Demand Curve
7 X (units) Y*=I/P Y P X >P Y 0 Y (units) Chapter Five Example: Suppose U = x + y. Income, I, is spent only on x and y. Prices are p x and p y . When p x < p y , the price consumption curve is x = I/p x . When p x > p y , the price consumption curve is y* = I/p y . Between, it is x + y = I Price Consumption Curve

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8 X (units) Y*=I/P Y P X >P Y P X =P Y P X <P Y 0 Chapter Five Y (units) Price Consumption Curve
9 X (units) Y*=I/P Y P X >P Y P X =P Y P X <P Y IC 1 IC 2 IC 3 0 Chapter Five Price Consumption Curve Y (units)

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10 The corresponding  demand for x is:    X = I/p x    when p x  < p y          I – y when p x  = p y              0 when p x  > p y X P X 0 P Y I/P Y -Y I/P X Chapter Five Demand Curve for “X”
11 Algebraically, we can solve for the individual’s demand using the following equations: 1. p x x + p y y = I 2. MU x /p x = MU y /p y at a tangency. (If this never holds, a corner point may be substituted where x = 0 or y = 0) Chapter Five Demand Curve for “X”

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12 We Have: 1. p x x + p y y = I 2. x/p y = y/p x Substituting the second condition into the budget constraint, we then have: 3. p x x + p y (p x /p y )x = I or…x = I/2p x Chapter Five Demand Curve with an Interior Solution Suppose that U(x,y) = xy. MUx = y and MUy = x. The prices of x and y are px and py, respectively and income = I.
13 Suppose U = xy + 10x. MU x =y + 10 and MU y = x. All the other notation is as in the last example. Recall that indifference curves such as these

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ch05 ppt notes - Chapter Five The Theory Of Demand Chapter...

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