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topic3_consumer behaviorII - Microeconomics 2233 Topic 3...

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Microeconomics 2233, Topic 3 Consumer behavior II Bei Li 1
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Topic 3 Consumer behavior II ( Chapter 5,3,9 in Perloff) 1. Comparative Statics 2. Elasticity 3. Decomposition of the price effect Substitution effect and income effect Marshallian demand and Hicksian demand 4. Price Index 5 C S l 5. Consumer Surplus 2
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1 Comparative Statics 1.Comparative Statics What happens if prices or income change? A. Deriving demand curves (change in price) How quantity demand changes as price changes When P x drops to P x Holding all other factors constant (income, tastes, other prices…) 3
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AOG Price consumption B A curve (PCC) I/P ‘ Good X U’ U P x I/P x I/P x Price of X P x D M = f(P x ,P y ,I, ) Good X X’ X0 4
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PCC and the Demand Curve Price Ͳ Consumption Curve : trace of optimal choices as price changes. Every point on the demand curve corresponds to an optimal choice point on PCC. PCC can be upward Ͳ sloping, flat or downward Ͳ sloping (simplified as a straight line in textbook). 5
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Possible cases Good y Good x 6
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Possible cases Good y Good x 7
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Possible cases Good y Good x 8
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1 Comparative Statics (Cont ) 1.Comparative Statics (Cont.) B. Shift of demand curve (Change in Income) How quantity demand changes as income changes When I increases to I’ When I increases to I Holding all other factors constant ( price , tastes, other prices ) other prices…) 9
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AOG Income Consumption Curve (ICC) I /P Good X U’ U P x I 0 /P x I/P x Price of X I’/P x D D’ Good X X X’ 10
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ICC and the Engel Curve Income Ͳ Consumption Curve : trace of optimal choices as income changes. Income effect: how consumption of a good changes as income changes (for good X) normal good vs inferior good E ercise Consider three possible cases Exercise: Consider three possible cases. Engel Curve : relationship between income and consumption of a good. 11
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Income Good x 12
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Three possible cases of ICC ear are feet perye Food inferior, housing normal ICC 1 using, Squa Food normal a L 2 Ho Food normal, housing normal b L 1 ICC 2 e Food normal, housing inferior c I ICC 3 Food, Pounds peryear 13
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Y 3 L 3 y ear (a) Indifference Curves and Budget Constraints A good That Is Both Inferior When Gail was poor Y 2 L 2 e 3 Income-consumption curve her goods per and Normal and her income increased Y 1 L 1 e 2 I 3 All oth increased.. …she bought more hamburger e 1 I 1 I 2 H b But as she became wealthier and her Y 3 Income E 3 Hamburger peryear (b) Engel Curve income rose… ….she bought less Y 2 Y, E 2 Engel curve hamburger and more steak.
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