Chapter Four Notes

The individual demand curve has two important

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Unformatted text preview: wo goods as the price of one change. Individual demand curve □ Curve relating the quantity of a good that a single consumer will buy to its price. The individual demand curve has two important properties: 1. The level of utility that can be attained changes as we move along the curve. 2. At every point on the demand curve, the consumer is maximizing utility by satisfying the condition that the marginal rate of substitution (MRS) of food for clothing equals the ratio of the prices of food and clothing. Engel Curves □ Curve relating the quantity of a good consumed to income. Substitutes and Complements Two goods are substitutes if an increase in the price of one leads to an increase in the quantity demanded of the other. Two goods are complements if an increase in the price of one good leads to a decrease in the quantity demanded of the other. Two goods are independent if a change in the price of one good has no effect on the quantity demanded of the other. The fact that goods can be complements or substitutes suggests that when studying the effects of price changes in one market, it may be important to look at the consequences in related markets. Substitution Effect Substitution effect Change in consumption of a good associated with a change in its price, with the level of utility held constant. Income Effect Income effect Change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant. A Special Case: The Giffen Good Giffen good □ Good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect...
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This note was uploaded on 03/04/2013 for the course ECON 326 taught by Professor Hulten during the Spring '08 term at Maryland.

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