1 / 12

Changes In Income - PowerPoint PPT Presentation

Changes In Income. A rise in income - with no change in price - leads to a new quantity demanded for each good Normal good quantity demanded increases Inferior good quantity demanded decreases Depends on the individual’s preferences. Changes In Income. Initial Income= \$150;

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

PowerPoint Slideshow about ' Changes In Income' - graceland

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

• A rise in income - with no change in price - leads to a new quantity demanded for each good

• Normal good

• quantity demanded increases

• Inferior good

• quantity demanded decreases

• Depends on the individual’s preferences

• Initial Income= \$150;

• New Income = \$300 per month

• Pconcert=\$30; Pmovie=\$10

• Figure 5 Effects of an Increase in Income

Number of Movies per Month

27

A

15

B

12

H

C

9

D

6

E

3

F

1

2

3

4

5

6

7

8

9

10

Number of Concerts per Month

Changes In Income

• Figure 5 Effects of an Increase in Income

2. If his preferences are as given in the table, he'll choose point H

H''

1. When Max's income rises to \$300, his budget line shifts outward.

3.But different marginal utility numbers could lead him to H' or H''

H'

• Rotates the budget line rightward

• The consumer will select the combination of movies and concerts

• On his budget line

• Makes him as well off as possible

• Marginal utility per dollar spent on both goods is the same

• Income = \$150 per month

• Initial: Pconcert=\$30; Pmovie=\$10;

• Change: Pconcert=\$10; Pmovie=\$10

• Figure 6 Deriving the Demand Curve

Number of Movies per Month

10

8

6

0

3

5

7

10

15

30

Price per Concert

\$30

10

5

3

7

10

Number of Concerts per Month

Deriving the Demand Curve

• Figure 6 Deriving the Demand Curve

1. When the price of concerts is \$30, point D is best for Max.

2. If the price falls to \$10, Max's budget line rotates rightward, and he chooses point J.

K

J

D

3. And if the price drops to \$5, he chooses point K.

D

4. The demand curve shows the quantity Max chooses at each price.

J

K

• As the price of a good falls, the consumer substitutes that good in place of other goods whose prices have not changed.

• Change in the relative price

• Price decreases - increase quantity demanded

• Price increases - decrease quantity demanded

• As the price decreases - increase purchasing power

• Normal goods - increase quantity demanded

• Inferior goods - decrease quantity demanded

• Price increases - decrease purchasing power

• Normal Goods

• Substitution and income effects work together

• Must always obey the law of demand

• Inferior Goods

• Substitution and income effects work against each other

• The substitution effect dominates

• Virtually always obey law of demand

• Figure 7 Income and Substitution Effects

Price Decrease:

Ultimate Effect

(Almost Always)

Substitution Effect

P

QD

Þ

QD

QD

if normal

QD

if inferior

Price Increase:

Substitution Effect

P

QD

Þ

QD

QD

if normal

QD

if inferior

George

Elaine

Price

Price

Price

\$4

\$4

\$4

3

3

3

2

2

2

1

1

1

0

4

12

0

6

12

0

10

20

Consumers in Markets

• Figure 8 From Individual to Market Demand

=

+

+

C

C'

C''

Number of Bottles per Week

\$4

3

2

1

3

10

27

44

Number of Bottles per Week

Deriving the Market Demand Curve

• Figure 8 From Individual to Market Demand

A

Market Demand Curve

- obtained by adding up the total quantity demanded by all market participants at different prices

B

C

D

E