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Chapter6 - Chapter 6 Demand 1 Demand functions relate...

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Chapter 6 - Demand 1. Demand functions - relate prices and income to choices How do choices change as economic environment changes? 2. Changes in income (a) this is a parallel shift out of the budget line (b) increase in income increases demand - normal good (see figure 6.1. in the textbook) (c) increase in income decreases demand - inferior good (see figure 6.2. in the textbook) (d) as income changes, the optimal choice moves along the income expansion path (e) the relationship between the optimal choice and income, with prices fixed, is called the Engel curve (see figure 6.3. in the textbook) (f) examples: perfect substitutes (see figure 6.4. in the textbook) perfect complements (see figure 6.5. in the textbook) Cobb-douglas prefereces (see figure 6.6. in the textbook) homothetic preferences - income offer curves are straight lines through the origin, i.e. when income is scaled up or down by any amount t > 0, the demanded bundle scales up or down by the same amount (see figure 6.7. in the textbook) quasilinear preferences (see figure 6.8. in the textbook)
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