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

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

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<ul><li> Slide 1 </li> <li> Chapter Six Demand </li> <li> Slide 2 </li> <li> Income Changes u A plot of quantity demanded against income is called an Engel curve. </li> <li> Slide 3 </li> <li> Income Changes Fixed p 1 and p 2. y &lt; y &lt; 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 </li> <li> Slide 4 </li> <li> 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 </li> <li> Slide 5 </li> <li> Income Changes and Cobb- Douglas Preferences Rearranged to isolate y, these are: Engel curve for good 1 Engel curve for good 2 </li> <li> Slide 6 </li> <li> Income Changes and Cobb- Douglas Preferences y y x1*x1* x2*x2* Engel curve for good 1 Engel curve for good 2 </li> <li> Slide 7 </li> <li> 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 </li> <li> Slide 8 </li> <li> Income Changes and Perfectly- Complementary Preferences Rearranged to isolate y, these are: Engel curve for good 1 Engel curve for good 2 </li> <li> Slide 9 </li> <li> Income Changes x1x1 x2x2 y &lt; y &lt; 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. </li> <li> Slide 10 </li> <li> Quasi-linear Indifference Curves x2x2 x1x1 Each curve is a vertically shifted copy of the others. Each curve intersects both axes. </li> <li> Slide 11 </li> <li> Income Changes; Quasilinear Utility x2x2 x1x1 x1x1 ~ x1*x1* y x1x1 ~ Engel curve for good 1 </li> <li> Slide 12 </li> <li> Income Changes; Quasilinear Utility x2x2 x1x1 x1x1 ~ x2*x2* y Engel curve for good 2 </li> <li> Slide 13 </li> <li> 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. </li> <li> Slide 14 </li> <li> 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. </li> <li> Slide 15 </li> <li> Income Changes; Goods 1 &amp; 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 </li> <li> Slide 16 </li> <li> Income Changes; Good 2 Is Normal, Good 1 Becomes Income Inferior x2x2 x1x1 Income offer curve </li> <li> Slide 17 </li> <li> 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 </li> <li> Slide 18 </li> <li> Ordinary Goods u A good is called ordinary if the quantity demanded always increases as its own-price decreases. </li> <li> Slide 19 </li> <li> 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 </li> <li> Slide 20 </li> <li> 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. </li> <li> Slide 21 </li> <li> 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. </li> <li> Slide 22 </li> <li> 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. </li> <li> Slide 23 </li> <li> 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 </li> <li> Slide 24 </li> <li> Own-Price Changes With p 2 and y fixed, higher p 1 causes smaller x 1 * and x 2 *. </li> <li> Slide 25 </li> <li> 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 </li> <li> Slide 26 </li> <li> 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 </li> <li> Slide 27 </li> <li> Own-Price Changes and </li> <li> Slide 28 </li> <li> 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 </li> <li> Slide 29 </li> <li> 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. </li> <li> Slide 30 </li> <li> 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 </li> </ul>