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M607-W10-Chapter_04

# M607-W10-Chapter_04 - Chapter 4 Demand This chapter derives...

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4-1 Chapter 4. Demand MSci 607: Applied economics for management (winter 2010) Instructor: Bon Koo This chapter derives the demand curve both graphically and mathematically, based on the consumer’s 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.

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4-2 1. Derivation of demand curve: Graphical approach § Using the consumer theory discussed in the previous chapter, we c an now derive the demand curve. § Graphical approach We first examine how a consumer’s choice changes as the price changes. Price-consumption curve : The relation between the demand for two goods x an d y with changes in price. Demand curve : The relation between px and x . It is downward sloping (law of d emand), and expressed in the x-p plane. § Mathematical approach We know that demand is a function of price and other variables. For our two-good case ( x and y ), the demand functions are of the form x = X ( px , py , M ) y = Y ( px , py , M ) We can derive the demand function using the consumer’s utility maximization pr oblem under a budget constraint.
4-3 1.1. Graphical derivation of demand curve § When the price of x decreases (\$12  \$4), the budget line shifts outward, the equilibrium consumption bundles move from e 1 to e 3. § Price-consumption curve : The relation between the demand for two goods x and y with changes in pri ce. It is expressed in x-y plane and upwar d-sloping. With a decrease in px , the consumpti on of both goods increases. § Demand curve for good x The relation between px and x . It is downward sloping, showing the la w of demand.

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4-4 1.2. Mathematical derivation of demand curve Q. What is the demand functions of good x and y , for a given Cobb -Douglas utility function?
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M607-W10-Chapter_04 - Chapter 4 Demand This chapter derives...

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