Lecture+12+October+18

Lecture+12+October+18 - Todays agenda Income and...

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Today’s agenda Income and substitution effects of price changes on Q D Applying consumer theory: Do taxes reduce labor supply? Production functions Total, average, and marginal product
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B A M/p B M/p 1 A M/p 2 A M/p 3 A A 3 A 2 A 1 Deriving the demand curve for A
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B A M/p B M/ p 1 A M/ p 2 A M/ p 3 A A 3 A 2 A 1 Deriving the demand curve for A
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B A M/p B M/ p 1 A M/ p 2 A M/ p 3 A A 3 A 2 A 1 Deriving the demand curve for A
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$/A A p 1 A p 2 A p 3 A A 1 A 2 A 3 D A Deriving the demand curve for A Note label on vertical axis!
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Must demand curves slope downward? substitution effect of price decrease A price decrease makes the good relatively cheaper; its opportunity cost in terms of other goods falls. Consumer substitutes toward that good. income effect of price decrease Price decrease raises purchasing power, or “real income.” Consumer buys more of all non-inferior goods.
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B A M/p B M/p 1 A A 1
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B A M/p B M/p 1 A M/p 2 A A 1
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B A M/p B M/p 1 A M/p 2 A A 1
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B A M/p B M/p 1 A M/p 2 A A 2 A 1
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B A M/p B M/p 1 A M/p 2 A A 2 A 1
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B A M/p B M/p 1 A M/p 2 A A 2 A 1 Old real income New relative prices p 2 A /p B
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B A M/p B M/p 1 A M/p 2 A A 2 A 1 A 3
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B A M/p B M/p 1 A M/p 2 A A 2 A 1 A 3 Substitution effect
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B A M/p B M/p 1 A M/p 2 A A 2 A 1 A 3 Substitution effect Income effect
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Substitution effect of a price decrease is always an increase in consumption. Income effect of a price decrease is an
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This note was uploaded on 10/25/2011 for the course ECONOMICS 01:220:102 taught by Professor Prusa during the Fall '10 term at Rutgers.

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Lecture+12+October+18 - Todays agenda Income and...

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