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Unformatted text preview: 41Chapter 4.DemandMSci 607: Applied economics for management (winter 2010)Instructor: Bon KooThis chapter derives the demand curve both graphically and mathematically, based on the consumers optimal choice discussed in the previous chapter. We then examine some properties of demand curve. The concepts of substitution and income effects are very important in the consumer theory. We will skip sections 4.4 and 4.5.421. Derivation of demand curve: Graphical approachUsing the consumer theory discussed in the previous chapter, we can now derive the demand curve.Graphical approachWe first examine how a consumers choice changes as the price changes. Priceconsumption curve: The relation between the demand for two goods xand ywith changes in price. Demand curve: The relation betweenpxand x. It is downward sloping (law of demand), and expressed in the xpplane.Mathematical approachWe know that demand is a function of price and other variables.For our twogood case (xand y), the demand functions are of the formx= X(px, py, M)y= Y(px, py, M)We can derive the demand function using the consumers utility maximization problem under a budget constraint.431.1. Graphical derivation of demand curveWhen the price of xdecreases ($12 $4), the budget line shifts outward,the equilibrium consumption bundles move from e1 to e3.Priceconsumption curve:The relation between the demand for two goods xand ywith changes in price.It is expressed in xyplane and upwardsloping.With a decrease in px, the consumption of both goods increases.Demand curvefor good xThe relation betweenpxand x. It is downward sloping, showing the law of demand.441.2. Mathematical derivation of demand curveQ. What is the demand functions of good xand y, for a given CobbDouglas utility function?...
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This note was uploaded on 02/16/2010 for the course MTH 10 taught by Professor Gail during the Spring '10 term at 4.1.
 Spring '10
 Gail
 Math

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