chapter six demand. income changes u a plot of quantity demanded against income is called an engel...

Download Chapter Six Demand. Income Changes u A plot of quantity demanded against income is called an Engel curve

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  • Slide 1
  • Chapter Six Demand
  • Slide 2
  • Income Changes u A plot of quantity demanded against income is called an Engel curve.
  • Slide 3
  • Income Changes Fixed p 1 and p 2. y < y < y x 1 x 1 x1x1 x 2 x 2 x2x2 Income offer curve x1*x1* y x 1 x 1 x1x1 y y y Engel curve; good 1
  • Slide 4
  • Income Changes and Cobb- Douglas Preferences u An example of computing the equations of Engel curves; the Cobb- Douglas case. u The ordinary demand equations are
  • Slide 5
  • Income Changes and Cobb- Douglas Preferences Rearranged to isolate y, these are: Engel curve for good 1 Engel curve for good 2
  • Slide 6
  • Income Changes and Cobb- Douglas Preferences y y x1*x1* x2*x2* Engel curve for good 1 Engel curve for good 2
  • Slide 7
  • Income Changes and Perfectly- Complementary Preferences u Another example of computing the equations of Engel curves; the perfectly-complementary case. u The ordinary demand equations are
  • Slide 8
  • Income Changes and Perfectly- Complementary Preferences Rearranged to isolate y, these are: Engel curve for good 1 Engel curve for good 2
  • Slide 9
  • Income Changes x1x1 x2x2 y < y < y x 1 x1x1 x 2 x 2 x2x2 x 1 x1*x1* y y y y Engel curve; good 1 x 1 x 1 x1x1 Fixed p 1 and p 2.
  • Slide 10
  • Quasi-linear Indifference Curves x2x2 x1x1 Each curve is a vertically shifted copy of the others. Each curve intersects both axes.
  • Slide 11
  • Income Changes; Quasilinear Utility x2x2 x1x1 x1x1 ~ x1*x1* y x1x1 ~ Engel curve for good 1
  • Slide 12
  • Income Changes; Quasilinear Utility x2x2 x1x1 x1x1 ~ x2*x2* y Engel curve for good 2
  • Slide 13
  • Income Effects u A good for which quantity demanded rises as income increases is called normal. u Therefore when a good is normal its Engel curve must be positively sloped.
  • Slide 14
  • Income Effects u A good for which quantity demanded falls as income increases is called inferior. u Therefore when a good is income inferior its Engel curve must be negatively sloped.
  • Slide 15
  • Income Changes; Goods 1 & 2 Normal x 1 x 1 x1x1 x 2 x 2 x2x2 Income offer curve x1*x1* x2*x2* y y x 1 x 1 x1x1 x 2 x 2 x2x2 y y y y y y Engel curve; good 2 Engel curve; good 1
  • Slide 16
  • Income Changes; Good 2 Is Normal, Good 1 Becomes Income Inferior x2x2 x1x1 Income offer curve
  • Slide 17
  • Income Changes; Good 2 Is Normal, Good 1 Becomes Income Inferior x2x2 x1x1 x1*x1* x2*x2* m m Engel curve for good 2 Engel curve for good 1
  • Slide 18
  • Ordinary Goods u A good is called ordinary if the quantity demanded always increases as its own-price decreases.
  • Slide 19
  • Ordinary Goods Fixed p 2 and y. x1x1 x2x2 p 1 price offer curve x1*x1* Downward-sloping demand curve Good 1 is ordinary p1p1
  • Slide 20
  • x 1 *(p 1 ) x 1 *(p 1 ) x 1 *(p 1 ) p1p1 x 1 *(p 1 ) x 1 *(p 1 ) x 1 *(p 1 ) p1p1 p 1 p 1 x1*x1* Own-Price Changes Ordinary demand curve for commodity 1 Fixed p 2 and y.
  • Slide 21
  • x 1 *(p 1 ) x 1 *(p 1 ) x 1 *(p 1 ) p1p1 x 1 *(p 1 ) x 1 *(p 1 ) x 1 *(p 1 ) p1p1 p 1 p 1 x1*x1* Own-Price Changes Ordinary demand curve for commodity 1 p 1 price offer curve Fixed p 2 and y.
  • Slide 22
  • Own-Price Changes u The curve containing all the utility- maximizing bundles traced out as p 1 changes, with p 2 and y constant, is the p 1 - price offer curve. u The plot of the x 1 -coordinate of the p 1 - price offer curve against p 1 is the ordinary demand curve for commodity 1.
  • Slide 23
  • Own-Price Changes u What does a p 1 price-offer curve look like for a perfect-complements utility function? Then the ordinary demand functions for commodities 1 and 2 are
  • Slide 24
  • Own-Price Changes With p 2 and y fixed, higher p 1 causes smaller x 1 * and x 2 *.
  • Slide 25
  • p1p1 x1*x1* Ordinary demand curve for commodity 1 is Fixed p 2 and y. Own-Price Changes x1x1 x2x2 p1p1 p 1 p 1 y/p 2
  • Slide 26
  • Own-Price Changes u What does a p 1 price-offer curve look like for a perfect-substitutes utility function? Then the ordinary demand functions for commodities 1 and 2 are
  • Slide 27
  • Own-Price Changes and
  • Slide 28
  • Fixed p 2 and y. Own-Price Changes x2x2 x1x1 p1p1 x1*x1* Fixed p 2 and y. p1p1 p 2 = p 1 p 1 p 1 price offer curve Ordinary demand curve for commodity 1
  • Slide 29
  • Giffen Goods u If, for some values of its own-price, the quantity demanded of a good rises as its own-price increases then the good is called Giffen.
  • Slide 30
  • Giffen Goods Fixed p 2 and y. x1x1 x2x2 p 1 price offer curve x1*x1* Demand curve has a positively sloped part Good 1 is Giffen p1p1