W12 MIC 09 Origins of Demand

# W12 MIC 09 Origins of Demand - ORIGINS OF DEMAND(B&B...

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1 Northwestern University ECON 310-1: Microeconomic Theory Profs Jim Hornsten & Ron Braeutigam Winter 2012 Optimal Choice & Demand Effects of Changing Income Income Consumption Curve Engel Curves Normal & Inferior Goods Effects of Changing Price Price Consumption Curve Downward Sloping Demand Giffen Goods? Algebraic Origins of Demand Notes for Lecture #09 x P x Whoa! Demand ORIGINS OF DEMAND (B&B Section 5.1)

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2 DEMAND CURVE PRIMER # Potential Buyers Demographic Shifts (Census!) Population Size Household Income Normal Goods (if I up, buy more) Inferior Goods (if I up, buy less) Tastes & Preferences Fads, Trends, Coolness Price & Availability of Related Goods Substitutes (X used instead of Y) Complements (X and Y used together) Expectation of Environmental Changes Relative prices, tech, govt, law DEMAND CURVE SHIFTERS P Q D A price change causes movement along a given demand curve, but a change in one of these determinants shifts the entire D curve. What qty, Q, will be purchased at any given price, P, in the market? Demand Q[P] What price, P, will this market bear if Q units are purchased? Inverse Demand P[Q] Interesting endpoints: “Choke Price” at Q=0 “Giveaway Qty” at P=0 . For linear version P[Q]=a-bQ , constant slope = dP/dQ = -b Revenue PQ is rectangle under D. Sub-D area is total WTP of buyers.
3 Northwestern University ECON 310-1: Microeconomic Theory Profs Jim Hornsten & Ron Braeutigam Winter 2012 Optimal Consumer Choice BL 1 x y A U 1 x A Consumer: Choose (x, y) to maximize U[x, y] subject to xP x + yP y I 1 For nice indifference curves (e.g., smooth, dim MRS x,y ) and linear budget lines (constant slope of -P x /P y ), we expect an interior solution (x>0, y>0) at bundle where IC and BL are tangent. When IC’s and/or BL’s aren’t so nice, we look for corner points (either x=0 or y=0 ) and often rely on bang for the buck logic - if the MU/P ratios aren’t equal across goods, there may be a way to reallocate spending to boost utility. y A

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4 Northwestern University ECON 310-1: Microeconomic Theory Profs Jim Hornsten & Ron Braeutigam Winter 2012 Optimal Consumer Choice: Comparative Statics on Income Using optimal choice (BL&IC) diagram, hold all prices fixed, but vary income , and track changes in quantity demanded of x BL 1 x y U 2 A B U 1 BL 2 x A x B x B B BL 2 I 2 x A A BL 1 I 1 Qty of x Demanded Optimal Bundle Budget Line Income NOTE: To vary income means to allow parallel shifts of the budget line. Consumer: Choose (x, y) to maximize U[x, y] subject to xP x + yP y I 2
5 Northwestern University ECON 310-1: Microeconomic Theory Profs Jim Hornsten & Ron Braeutigam Winter 2012 Optimal Consumer Choice: Comparative Statics on Income We continue to vary income , and keep tracking changes in quantity demanded of x BL 1 x y U 2 U 3 A B U 4 U 1 BL 2 BL 3 BL 4 C D x A x B x C x D x D D BL 4 I 4 x C C BL 3 I 3 x B B BL 2 I 2 x A A BL 1 I 1 Qty of x Demanded Optimal

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