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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;

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Changes in income
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 income1
Changes In Income

  • Initial Income= $150;

  • New Income = $300 per month

  • Pconcert=$30; Pmovie=$10

  • Figure 5 Effects of an Increase in Income


Changes in income2

30

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'


Changes in price
Changes In Price

  • 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


Changes in price1
Changes In Price

  • Income = $150 per month

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

  • Change: Pconcert=$10; Pmovie=$10

  • Figure 6 Deriving the Demand Curve


Deriving the demand curve

15

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


The substitution effect
The Substitution Effect

  • 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


The income effect
The Income Effect

  • As the price decreases - increase purchasing power

    • Normal goods - increase quantity demanded

    • Inferior goods - decrease quantity demanded

  • Price increases - decrease purchasing power


Combining substitution and income effect
Combining Substitution and Income Effect

  • 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


Income and substitution effects
Income and Substitution Effects

  • Figure 7 Income and Substitution Effects

Price Decrease:

Ultimate Effect

(Almost Always)

Substitution Effect

P

QD

Þ

QD

QD

if normal

Purchasing Power

QD

if inferior

Price Increase:

Substitution Effect

P

QD

Þ

QD

QD

if normal

Purchasing Power

QD

if inferior


Consumers in markets

Jerry

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


Deriving the market demand curve

Price

$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


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