Individual and Market Demand Chapter 4. INDIVIDUAL DEMAND. Price Changes Using the figures developed in the previous chapter, the impact of a change in the price of food can be illustrated using indifference curves.
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Using the figures developed in the previous chapter, the impact of a change in the price of food can be illustrated using indifference curves.
For each price change, we can determine how much of the good the individual would purchase given their budget lines and indifference curves
Each price leads to different amounts of food purchased
●price-consumption curve: Curve tracing the utility-maximizing combinations of two goods as the price of one changes.
individual demand curve: Curve relating the quantity of a good that a single consumer will buy to its price.
Ex: movie tickets and video rentals
Ex: gasoline and motor oil
Ex: chicken and airplane tickets
The substitution effect,F1E,
(from point A to D), changes the
relative prices but keeps real income
The income effect, EF2,
( from D to B) keeps relative
prices constant but
increases purchasing power.
Income and SubstitutionEffects: Normal Good
inferior good, the
income effect is
the substitution effect
is larger than the
Income and SubstitutionEffects: Inferior Good
Ep is less than 1 in absolute value
Quantity demanded is relative unresponsive to a change in price
%Q < %P
Total expenditure (P*Q) increases when price increases
Ep is greater than than 1 in absolute value
Quantity demanded is relative responsive to a change in price
%Q > %P
Total expenditure (P*Q) decreases when price increases
Domestic demand for wheat is given by the equation
QDD = 1430 – 55P
where QDD is the number of bushels (in millions) demanded domestically, and P is the price in dollars per bushel. Export demand is given by
QDE = 1470 − 70P
where QDE is the number of bushels (in millions) demanded from abroad.
To obtain the world demand for wheat, we set the left side of each demand equation equal to the quantity of wheat. We
then add the right side of the equations, obtaining
QDD + QDE = (1430 − 55P) + (1470 − 70P) = 2900 − 125P
Assuming: Price & income elasticity are constant
The slope, -b = price elasticity of demand
Constant, c = income elasticity of demand
Price elasticity = -0.24 (Inelastic)
Income elasticity = 1.46
Income elasticity = 0.62
Cross elasticity = 0.14