Lecture6 - Lecture 6 Individual Demand Price changes,...

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Lecture 6 Individual Demand Price changes, income changes Normal, inferior goods; Engel curves Income and Substitution Effect
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Price Changes A B C X Price Of X Y Price/Consumption curve Demand curve P(A)X P(A) P(B)X P(B)
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Price changes and the demand curve: An increase in the price of X relative to Y – from P(A) to P(B) – rotates the budget line in A different indifference curve is now tangent to the new budget line, at a lower value of X Each tangency relates to a point on the demand curve. An individual demand curve is defined for a particular income level. At every point on the demand curve the consumer is maximizing utility subject to the budget line that corresponds to each price of the good. As the price of X decreases (holding the price of Y constant), the price ratio decreases, so the MRS must also decline. A lower MSR is associated with higher levels of X, relative to Y: thus, demand for X increases as its price declines.
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This note was uploaded on 01/17/2012 for the course ECON 100A taught by Professor Safarzadeh during the Fall '09 term at UC Irvine.

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Lecture6 - Lecture 6 Individual Demand Price changes,...

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