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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 • 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; • New Income = $300 per month • Pconcert=$30; Pmovie=$10 • Figure 5 Effects of an Increase in Income
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 • 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 Price • Income = $150 per month • Initial: Pconcert=$30; Pmovie=$10; • Change: Pconcert=$10; Pmovie=$10 • Figure 6 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 • 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 • 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 • 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 • 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
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
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
