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# lecture2 - Microeconomics I Lecture#2 2 Theory of Demand...

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Microeconomics I - Lecture #2, February 24, 2009 2 Theory of Demand, Slutsky Equation 2.1 Theory of Demand Based on the analysis of consumer’s optimal consumption we know that the demand depends on individual preferences, prices, and income. Now we will analyze how the demand changes as prices and income change. Change in income: (keeping prices constant) Normal good: if income increase consumption increase as well Inferior good: increase in income causes reduction in consumption (low-quality good) Set of bundles of goods that are demanded at the different levels of income is called income offer curve (income expansion path). For each level of income, there is some optimal choice for each of the goods. The graph of the demand for one of the goods as a function of income with all prices being held constant is called the Engel curve . Two goods are perfect substitutes: If p 1 < p 2 , consumer spends entire budget on good 1 and therefore buys x 1 = I/p 1 units. Income offer curve is a horizontal axis. If income increases, consumption of good 1 increases as well. Engel curve is a linear line, because I = p 1 x 1 . 5

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Two goods are perfect complements: Consumer consumes the same amount of each good, the income curve is the diagonal line through the origin. The demand for good 1 is x 1 = I/ ( p 1 + p 2
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lecture2 - Microeconomics I Lecture#2 2 Theory of Demand...

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