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IE 545 Session 22

IE 545 Session 22 - Session 22 IE 545 Fall 2013 Scribe...

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Session’22 ’ IE’545’Fall’2013 Scribe:’Parithi’Govindaraju ’ IE 545 Session 22 Income and Substitution Effects Two’types’of’goods 1. “Normal”’goods’(if’income’increases,’we’buy’more’of’these’goods) x i I > 0 ’ ’ 2. “Inferior”’goods’(if’income’increases,’we’buy’more’of’these’goods)’ x i I < 0 As’I’increases’,’both’X’and’Y’increase. Y’is’a’“normal’ good,’ but’X’is’an’“inferior”’good.’As’I’ increases,’we’use’less’of’X,’but’more’of’Y. Elasticity of Demand (This’is’ a’form’of’COMPARATIVE’STATICS.’What’happens’tot’the’output’if’the’input ’ changes?)’ There’is’an’inverse’relationship’between’demand’for’a’good’and’its’price.’How’can’we’quantify’ demand?’The’total’revenue’equals’the’price’times’the’demand’for’the’good.
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