Lecture%2012%20March%202

Lecture%2012%20March%202 - Todays agenda Income and...

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Today’s agenda Income and substitution effects of price changes on Q D Applying consumer theory: Do taxes reduce labor supply? Production functions Total, average, and marginal product Short-run total cost functions
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Must demand curves slope downward? substitution effect of price decrease A price decrease makes the good relatively cheaper; its opportunity cost in terms of other goods falls. Consumer substitutes toward that good. income effect of price decrease Price decrease raises purchasing power, or “real income.” Consumer buys more of all non-inferior goods.
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Substitution effect of a price decrease is always an increase in consumption. Income effect of a price decrease is an increase in consumption for any non-inferior good. Total effect of a price decrease is an increase in consumption for any non-inferior good. Thus the demand curve for any non-inferior good has a negative slope. The slope of demand curves
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For a price decrease: The substitution effect is always an increase in consumption. Income effect is a decrease in consumption for an inferior good. Total effect is theoretically ambiguous for an inferior good. Thus the demand curve for some inferior goods could possibly be upward sloping. Among ordinary consumption goods,
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This note was uploaded on 03/08/2011 for the course ECON 220 taught by Professor Cai during the Spring '08 term at Rutgers.

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Lecture%2012%20March%202 - Todays agenda Income and...

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