topic3_consumer behaviorII

classifications 1 elastic 1 inelastic 1 unit elastic

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Unformatted text preview: sticity of demand(Cont (Own) price elasticity of demand(Cont.) • Classifications • • • 1, elastic 1 , inelastic 1 , unit elastic unit elastic • Elasticity &Expenditure(Revenue) ( p Q) ( p Q) p pQ Q(1 Q(1 pQ Qp ) pQ ) 17 Cross price elasticity of demand Cross price elasticity of demand XY • • QX / QX pY / pY QX pY pY QX XY>0 means X and Y are substitutes. XY<0 means X and Y are complements. 18 Income elasticity of demand All in percentage I • • Q/Q I/I QI IQ I<0 inferior good I>0 normal good 19 3. Decomposition of price effect Decomposition of price effect • Price effect: The effect of price change on a consumer’s demand • Two effects of price change (increase) – Substitution effect: relative price change effect relative price change – Income effect: less purchasing power • Why decompose? 20 • Suppose p0 rises to p1 (Normal goods) C B A Inc. U0 Sub. Total x1 xCV U1 x0 I / P 0 1 I’ / P1 I0 / P0 Good x 21 • Substitution effect : always negative – As price goes up (down), the demand reduces price goes up (down) the demand reduces (increases). • In...
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This document was uploaded on 03/16/2014 for the course ECONOMICS 106 at Oxford University.

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