chapter_4

# chapter_4 - Individual Demand Effect of a Price Change...

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Chapter 4 Slide 1 Individual Demand: Effect of a Price Change Food (units per month) Clothing (units per month) 4 5 6 U 2 U 3 A B D U 1 4 12 20 Three separate indifference curves are tangent to each budget line. Assume: I = \$20 P C = \$2 P F = \$2, \$1, \$.50 10

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Chapter 4 Slide 2 Price-Consumption Curve Individual Demand: Effect of a Price Change Food (units per month) Clothing (units per month) 4 5 6 U 2 U 3 A B D U 1 4 12 20 The price-consumption curve traces out the utility maximizing market basket for the various prices for food.
Chapter 4 Slide 3 Individual Demand: Effect of a Price Change 1) The level of utility that can be attained changes as we move along the curve. 2) At every point on the demand curve, the consumer is maximizing utility by satisfying the condition that the MRS of food for clothing equals the ratio of the prices of food and clothing. The Individual Demand Curve: 2 Important Properties

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Chapter 4 Slide 4 Individual Demand: Effect of a Price Change Food (units per month) Price of Food H E G \$2.00 4 12 20 \$1.00 \$.50 Demand Curve E : P f /P c = 2/2 = 1 = MRS G: P f /P c = 1/2 = . 5 = MRS H:P f /P c = .5/2 = .25 = MRS
Chapter 4 Slide 5 Individual Demand: Effect of Income Changes Food (units per month) Clothing (units per month) An increase in income, with the prices fixed, causes consumers to alter their choice of market basket. Income-Consumption Curve 3 4 A U 1 5 10 B U 2 D 7 16 U 3 Assume: P f = \$1 P c = \$2 I = \$10, \$20, \$30

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Chapter 4 Slide 6 Individual Demand: Effect of Income Changes Food (units per month) Price of food An increase in income, from \$10 to \$20 to \$30, with the prices fixed, shifts the consumer’s demand curve to the right. \$1.00 4 D 1 E 10 D 2 G 16 D 3 H
Chapter 4 Slide 7 Individual Demand: Effect of Income Changes Income Changes When the income-consumption curve has a positive slope, the quantity demanded increases with income; the income elasticity of demand is positive. The good is a normal good. When the income-consumption curve has a negative slope, the quantity demanded decreases with income; the income elasticity of demand is negative. The good is an inferior good. Normal Good vs. Inferior Good

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Chapter 4 Slide 8 Individual Demand: Effect of Income Changes with an Inferior Good Hamburger (units per month) Steak (units per month) 15 30 U 3 C Income-Consumption Curve …but hamburger becomes an inferior good when the income consumption curve bends backward between B and C. 10 5 20 5 10 A U 1 B U 2 Both hamburger and steak behave as a normal good, between A and B...
Slide 9 Individual Demand: Effect of Income Changes Engel Curves Engel curves relate the quantity of good consumed to income. If the good is a normal good, the Engel

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chapter_4 - Individual Demand Effect of a Price Change...

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