econ11_09_lecture4

econ11_09_lecture4 - Lecture 3: Consumer Theory (contd)...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Chaiyuth DB802 2011 1 Lecture 3: Consumer Theory (cont d) Topics 1.5 Properties of Demand Keywords: Relative prices, real income Substitution and income effects, Slutsky equation, Law of Demand
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chaiyuth DB802 2011 2 1.5.1 Relative Prices and real income Relative prices of good x in terms of good y = units of good y foregone per unit of good x acquired. p x / p y = units of y / a unit of x Example. p x / p y = 3 means that to get a unit of x, we have to sacrifice 3 units of y. In other words, price of x is 3 times higher than of y.
Background image of page 2
Chaiyuth DB802 2011 3 1.5.1 Relative Prices and real income Real income: number of units of goods we could get from our money income. Reflect our purchasing power over a single good. Nominal income / price of good x = units of x. Marshallian demand is HD 0 in prices and income. No money illusion
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chaiyuth DB802 2011 4 1.5.1 Relative Prices and real income Theorem 1.10: Homogeneity and Budget Balancedness Given u is continuous, st. increasing, and st. quasiconcave, x(p,y) is HD zero in all prices and income, and it satisfies budget balancedness, px=y for all (p,y) . Idea: as MU is positive, you will use up your money. For any (p,y), budget is binding.
Background image of page 4
Chaiyuth DB802 2011 5 1.5.1 Relative Prices and real income As for Homogeneity, we can use price of one good to be money unit. All things are compared to the price of this good. We call this good as numeraire. Say p n be numeraire; let t = 1/ p n x(p,y) = x(tp,ty) = x ( p 1 /p n , ... , p n-1 /p n , y / p n ) Demand depends on only n-1 relative prices, and real income.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chaiyuth DB802 2011 6 1.5.2 Income and Substitution Effects How consumers respond to a relative price change. Suppose the price of good 1 becomes cheaper, we will buy more of good 1. Very likely, but could this be only an answer? Let talk about few concepts on
Background image of page 6
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 7 Chaiyuth DB802 2011
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Effect of a Price Change Demand Curve Individual Demand relates the quantity of a good that a consumer will buy to the price of that good. Food (units per month) Price of Food H E G $2.00 4 12 20 $1.00 $.50 8 Chaiyuth DB802 2011
Background image of page 8
Chaiyuth DB802 2011 9 Two Important Properties of Demand Curves 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.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Effects 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 10 Chaiyuth DB802 2011
Background image of page 10
Effects 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.
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/20/2011 for the course OPR 201 taught by Professor Pp during the Spring '11 term at Thammasat University.

Page1 / 49

econ11_09_lecture4 - Lecture 3: Consumer Theory (contd)...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online