Microeconomics_chapter_04

Chapter 4 Slide 16
Individual Demand
Normal Good vs. Inferior Good
Income Changes
When the income-consumption curve has a negative slope: The quantity demanded decreases with income. The income elasticity of demand is negative. The good is an inferior good.
U2
Food (units per month)
4
Chapter 4
12
20
Slide 5
Effect of a Price Change
Clothing (units per month) The price-consumption curve traces out the utility maximizing market basket for the various prices for food.
Chapter 4
Slide 14
Individual Demand
Income Changes
An increase in income shifts the budget line to the right, increasing consumption along the income-consumption curve. Simultaneously, the increase in income shifts the demand curve to the right.
Chapter 4 Individual and Market Demand
Topics to be Discussed
Individual Demand Income and Substitution Effects Market Demand Consumer Surplus
Chapter 4
A
U1
6 5 4
Price-Consumption Curve
D B U3
U2
4
Chapter 4
12
20
Food (units per month)
Slide 6
Effect of a Price Change
Price of Food
$2.00
E
Individual Demand relates the quantity of a good that a consumer will buy to the price of that good.
$.50
H
Food (units per month)
4
Chapter 4
12
20
Slide 10
Individual Demand
Income Changes
Using the Food-Clothing example developed in chapter 3, the impact of a change in income can be illustrated using indifference curves.
$1.00
E
G
H
D3 D2 D1
4
Chapter 4
10
16
Food (units per month)
Slide 13
Individual Demand
Income Changes
The income-consumption curve traces out the utility-maximizing combinations of food and clothing associated with every income level.
Chapter 4
Slide 15
Individual Demand
Normal Good vs. Inferior Good
Income Changes
When the income-consumption curve has a positive slope: The quantity demanded increases with income. The income elasticity of demand is positive. The good is a normal good.
Slide 18
Individual Demand
Engel Curves
Engel curves relate the quantity of good consumed to income. If the good is a normal good, the Engel curve is upward sloping. If the good is an inferior good, the Engel curve is downward sloping.
Slide 2
Topics to be Discussed
Network Externalities Empirical Estimation of Demand
Chapter 4
Slide 3
Individual Demand
Price Changes
Using the figures developed in the previous chapter, the impact of a change in the price of food can be illustrated using indifference curves.
Chapter 4 Slide 9
Effect of a Price Change
Price of Food
When the price falls: Pf/Pc & MRS also fall
E
$2.00
G $1.00
•E: Pf/Pc = 2/2 = 1 = MRS •G: Pf/Pc = 1/2 = .5 = MRS •H:Pf/Pc = .5/2 = .25 = MRS Demand Curve
Chapter 4
Slide 11
Effects of Income Changes
Clothing (units per month) Assume: Pf = $1 Pc = $2 I = $10, $20, $30
7 5 3
A B U1 U2
Income-Consumption Curve D U3 An increase in income, with the prices fixed, causes consumers to alter their choice of market basket.
Chapter 4
Slide 8
Individual Demand
The Individual Demand Curve
Two Important Properties of Demand Curves
2) At every point on the demand curve, the consumer is maximizing utility by satisfying the condition that the MRS of food for clothing equals the ratio of the prices of food and clothing.
700
947 1725 2170 1697 3385 978
1274 2253 2371 1918 4109 1363
1514 3243 2536 1820 4888 1772
2054 4454 2137 2052 5429 1778
2654 5793 1540 2214 6220 2614
4300 9898 1266 2642 8279 3442
G $1.00 Demand Curve $.50 H
Food (units per month)
4
Chapter 4
12
20
Slide 7
Individual Demand
The Individual Demand Curve
Two Important Properties of Demand Curves 1) The level of utility that can be attained changes as we move along the curve.
Income ($ per month) 30
Inferior 20
Engel curve is backward bending for inferior goods.
Normal 10
0
Chapter 4
4
8
12
16
Food (units per month)
Slide 21
Consumer Expenditures in the United States
4
Chapter 4
10
16
Food (units per month)
Slide 12
Effects of Income Changes
Price of food
An increase in income, from $10 to $20 to $30, with the prices fixed, shifts the consumer’s demand curve to the right.