demand_and_changes

demand_and_changes - - we can also depict the relationship...

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Consumer demand, Price and Income Changes
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) We are going to: - derive demand curves from the equilibrium of the consumer - study how variations in income shift the demand curve - decompose the effects of a change in price in two effects: relative prices effect change in the opportunity set
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Deriving demand curves ) Changes in the price of a good (holding other prices and income) change the budget constraint and hence consumer’s optimal choice ) Exploring systematically the possible prices we obtain the relationship between prices and equilibrium quantities: this is consumer demand ) We may also be interested in the price-consumption curve or path of the equilibria (which indicate us levels of utility)
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Changes in income ) Imply a shift in demand ( a shift in the relationship prices-demanded quantities) ) A rise in income: - budget constraint shifts outwards - income-consumption curve shows how consumption changes with constant prices - we can depict the new demands
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Unformatted text preview: - we can also depict the relationship demanded quantity-income or Engel Curve ) Income elasticities:- See the different possible patterns of income consumption- Engel curve can be increasing, decreasing or have an inverted U form- Recall the definition of income elasticity: 8 Q / Q Y / Y-8 can be (normal goods), (inferior goods) and change over the income Effects of a price change ) The total effect of a price change can be decomposed in two effects:- Substitution effect: the substitution that consumer carries out at the same utility- unambiguous- compensated- Income effect: the variation in quantity attributable to the displacement of the budget constraint- different sign according to the elasticity- possibility of a Giffen good (demand rises with price) ) Effect of a price increase with normal good ) Effect of a price increase with an inferior good...
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demand_and_changes - - we can also depict the relationship...

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