1 / 30

300 likes | 329 Views

Chapter Six. Demand. Income Changes. A plot of quantity demanded against income is called an Engel curve. Income Changes. Fixed p 1 and p 2. y’ < y’’ < y’’’. Income offer curve. y. x 2 ’’’. y’’’. Engel curve; good 1. x 2 ’’. y’’. x 2 ’. y’. x 1 ’. x 1 ’’’. x 1 ’. x 1 ’’’.

Download Presentation
## Chapter Six

**An Image/Link below is provided (as is) to download presentation**
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.
Content is provided to you AS IS for your information and personal use only.
Download presentation by click this link.
While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

**Chapter Six**Demand**Income Changes**• A plot of quantity demanded against income is called an Engel curve.**Income Changes**Fixed p1 and p2. y’ < y’’ < y’’’ Incomeoffer curve y x2’’’ y’’’ Engelcurve; good 1 x2’’ y’’ x2’ y’ x1’ x1’’’ x1’ x1’’’ x1* x1’’ x1’’**Income Changes and Cobb-Douglas Preferences**• An example of computing the equations of Engel curves; the Cobb-Douglas case. • The ordinary demand equations are**Income Changes and Cobb-Douglas Preferences**Rearranged to isolate y, these are: Engel curve for good 1 Engel curve for good 2**Income Changes and Cobb-Douglas Preferences**y Engel curvefor good 1 x1* y Engel curvefor good 2 x2***Income Changes and Perfectly-Complementary Preferences**• Another example of computing the equations of Engel curves; the perfectly-complementary case. • The ordinary demand equations are**Income Changes and Perfectly-Complementary Preferences**Rearranged to isolate y, these are: Engel curve for good 1 Engel curve for good 2**Income Changes**Fixed p1 and p2. x2 y’ < y’’ < y’’’ y x2’’’ y’’’ Engelcurve; good 1 x2’’ y’’ x2’ y’ x1’ x1’’’ x1’’’ x1’ x1* x1 x1’’ x1’’**Quasi-linear Indifference Curves**x2 Each curve is a vertically shifted copy of the others. Each curve intersectsboth axes. x1**~**x1 Income Changes; Quasilinear Utility x2 Engelcurve forgood 1 y x1* ~ x1 x1**~**x1 Income Changes; Quasilinear Utility Engelcurve forgood 2 y x2 x2* x1**Income Effects**• A good for which quantity demanded rises as income increases is called normal. • Therefore when a good is normal its Engel curve must be positively sloped.**Income Effects**• A good for which quantity demanded falls as income increases is called inferior. • Therefore when a good is income inferior its Engel curve must be negatively sloped.**Income Changes; Goods1 & 2 Normal**Engelcurve; good 2 y y’’’ y’’ y’ Incomeoffer curve x2’’’ x2’ x2* y x2’’ x2’’’ y’’’ Engelcurve; good 1 x2’’ y’’ x2’ y’ x1’ x1’’’ x1’ x1’’’ x1* x1’’ x1’’**Income Changes; Good 2 Is Normal, Good 1 Becomes Income**Inferior x2 Incomeoffer curve x1**Income Changes; Good 2 Is Normal, Good 1 Becomes Income**Inferior m x2 Engel curvefor good 2 x2* m Engel curvefor good 1 x1* x1**Ordinary Goods**• A good is called ordinary if the quantity demanded always increases as its own-price decreases.**Ordinary Goods**Fixed p2 and y. Downward-sloping demand curve x2 p1 p1 price offer curve Û Good 1 isordinary x1* x1**p1**Own-Price Changes Ordinarydemand curvefor commodity 1 Fixed p2 and y. p1’’’ p1’’ p1’ x1* x1*(p1’) x1*(p1’’’) x1*(p1’’) x1*(p1’’’) x1*(p1’) x1*(p1’’)**p1**Own-Price Changes Ordinarydemand curvefor commodity 1 Fixed p2 and y. p1’’’ p1’’ p1 price offer curve p1’ x1* x1*(p1’) x1*(p1’’’) x1*(p1’’) x1*(p1’’’) x1*(p1’) x1*(p1’’)**Own-Price Changes**• The curve containing all the utility-maximizing bundles traced out as p1 changes, with p2 and y constant, is the p1- price offer curve. • The plot of the x1-coordinate of the p1- price offer curve against p1 is the ordinary demand curve for commodity 1.**Own-Price Changes**• What does a p1 price-offer curve look like for a perfect-complements utility function? Then the ordinary demand functionsfor commodities 1 and 2 are**Own-Price Changes**With p2 and y fixed, higher p1 causessmaller x1* and x2*.**p1**Own-Price Changes Ordinarydemand curvefor commodity 1 is Fixed p2 and y. p1’’’ x2 p1’’ y/p2 p1’ x1* x1**Own-Price Changes**• What does a p1 price-offer curve look like for a perfect-substitutes utility function? Then the ordinary demand functionsfor commodities 1 and 2 are**p1**Own-Price Changes Ordinarydemand curvefor commodity 1 Fixed p2 and y. Fixed p2 and y. p1’’’ x2 p2 = p1’’ p1 price offer curve p1’ x1* x1**Giffen Goods**• 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.**Giffen Goods**Demand curve has a positively sloped part Fixed p2 and y. x2 p1 p1 price offer curve Û Good 1 isGiffen x1* x1

More Related