IMCH4new07 - Chapter 4 Individual and Market Demand Chapter...

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Chapter 4 Individual and Market Demand Chapter Summary This chapter focuses on how purchase decisions respond to variations in price and income. The indifference curve analysis developed in Chapter 3 is used as a basis for virtually all the material presented in this chapter. The chapter begins by showing the change in consumer equilibrium when the price of one good changes. In the first section a price consumption curve is developed followed by the derivation of a demand curve. An example of a price consumption curve and a demand curve for the case of two substitutes is also developed. The section entitled "The Effects of Changes in Income" presents the income consumption curve and an Engel curve. A discussion of normal and inferior goods follows. The text spends a considerable amount of time developing income and substitution effects. Examples of income and substitution effects for perfect complements and substitutes are presented. The following section, "Consumer Responses to Changes in Price," continues the discussion of income and substitution effects and presents two examples: salt and housing. These examples drive home the point (often ignored in micro texts) that some goods (e.g., salt) have income effects which are extremely small while other goods (e.g., housing) have income effects which are large and should not be ignored. The section continues with a discussion of Giffen goods, pointing out that many historians do not believe that potatoes in Ireland were really Giffen goods. Individual demand curves are horizontally summed to form a market demand curve. The concept of elasticity (price, income, and crossprice) is developed, using numerous methods of calculation, to show the sensitivity of the market to various changes in prices and income. Four determinants of price elasticity are explored, and income elasticity is used to define luxuries and necessities. Chapter Outline Chapter Preview Effects of Changes in Prices The Effects of Changes in Income Income and Substitution Effects of a Price Change Consumer Responsiveness to Changes in Price Market Demand: Aggregating Individual Demand Curves Price Elasticity of Demand The Dependence of Market Demand on Income Cross-Price Elasticity of Demand Summary Appendix: Constant Elasticityof Demand, Segment-Ratio Elasticity, Income Compensated Demand Curves Teaching Suggestions 1. After all the claims of relevance in Chapters 1 and 2, and the development of a model in Chapter 3, we now begin to use the model. Unfortunately, something about price- consumption curves, income-consumption curves, and substitution and income effects just does not connect intuitively unless something other than the graphical exposition is done. Is there anything a price-consumption curve tells us that a normal demand curve cannot tell
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This note was uploaded on 09/16/2011 for the course ECON/ACCOU 101 taught by Professor Jang,hajoon during the Spring '11 term at Korea University.

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IMCH4new07 - Chapter 4 Individual and Market Demand Chapter...

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