Download Demand Theory

Task: Read Ch. 5
Ch 5. Demand Theory
The Effects Of Change In The Price
Of A Good On Consumption
Price Consumption Curve (PCC):
The set of utility maximizing baskets
as the price of one good varies
(holding constant income and the
prices of other goods).
The Effects Of Change In The Price Of A
Good On Consumption (continued)
Figure 5.1. Page 137
I = 40
Py = 4
Px = 4
Px = 2
Px = 1
The Effect Of A Change In Income
Income Consumption Curve (ICC):
The set of utility maximizing baskets
as income varies (and prices are held
constant).
The Effect Of A Change In Income
(continued)
Figure 5.2.
Px = 2
Py = 4
I = 40
I = 68
I = 92
Engel Curve
Engel curve:
A curve that relates the amount of commodity
purchased to the level of income, holding
constant the prices of all goods.
Figure 5.3. Page 141
Px = 2
Py = 4
I = 40
I = 68
I = 92
Note:
- Normal good:
a good that a consumer purchases more
of as income rises.
- Inferior good:
A good that a consumer purchases less
of as
income rises.
Finding A Demand Curve
A consumer purchase two goods
(food and clothing).
U(x,y) = XY; Px; Py; I
- find the demand curve?
- Is the food a normal good?
Substitution Effect And
Income Effect
Substitution effect:
the change in the amount of a good that
would be consumed as the price of that
good changes, holding constant all other
prices and the level utility.
Income effect:
the change in the amount of a good that a
consumer would buy as purchasing power
changes, holding all prices constant.
Substitution Effect And
Income Effect (continued)
Figure 5.6 Page 148
Price of food drops from Px1 to Px2.
Price of clothing is constant.
Consumer Surplus
Consumer surplus:
The difference between the
maximum amount a consumer is
willing to pay for a good and the
amount he or she must actually pay
when purchasing.
Figure 5.13. Page 159
Consumer Surplus (continued)
Suppose the equation Q = 40-4P
Represents a consumer’s monthly demand
curve for milk, where Q is the number of
gallons of milk purchased when the price is
P dollars per gallon.
1. What is the consumer surplus per month if the
price of milk is $ 3 per gallon?
2. What is the increase in consumer surplus if the
price falls to $ 2 per gallon
Market Demand
Market demand curve:
the horizontal sum of demand of the individual
consumers.
Qb(P) = 15 – 3P, when P < 5
= 0, when P = 5 or P > 5
Qc(P) = 6 – 2P, when P > 3
= 0, when P = 3 or P > 3
Q market (P) = ?
Homework:
5.7. Page 180