ch06 - Chapter 6 DEMAND RELATIONSHIPS AMONG GOODS 1...

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1 Chapter 6 DEMAND RELATIONSHIPS AMONG GOODS
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2 Substitutes and Complements • Two goods are substitutes if one good may replace the other in use • Two goods are complements if they are used together – examples: coffee & cream, fish & chips
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3 Gross Substitutes and Complements • The concepts of gross substitutes and complements makes the previous examples more precise: – two goods are gross substitutes if x i / p j > 0 – two goods are gross complements if x i / p j < 0
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4 Gross Complements Quantity of x Quantity of y x 1 x 0 y 1 y 0 U 1 U 0 When the price of y falls, the substitution and income effects are such that the consumer purchases more x and more y In this case, we call x and y gross complements x / p y < 0 y y x p I x p p y
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5 Gross Substitutes Quantity of x Quantity of y In this case, we call x and y gross substitutes x 1 x 0 y 1 y 0 U 0 When the price of y falls, the substitution effect may be so large that the consumer purchases less x and more y U 1 x / p y > 0
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6 A Mathematical Treatment • The change in x caused by a change in p y can be characterized using a Slutsky-type equation: * y d p h p d x y x y x I substitution effect (+) income effect (-) if x is normal combined effect (ambiguous)
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7 Asymmetry of the Gross Definitions • One undesirable characteristic of the gross
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This note was uploaded on 01/11/2011 for the course ECON 11 taught by Professor Cunningham during the Fall '08 term at UCLA.

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ch06 - Chapter 6 DEMAND RELATIONSHIPS AMONG GOODS 1...

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