Admin Income Your Demand Inc. and Sub. Ef. Mkt Demand
Lecture 5:
Individual and Market Demand
September 29, 2015
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Lecture 5: Individual and Market Demand, Lecture notes of Algebra
Mkt Demand. Overview. Course Administration. Change in Income and Changes in Consumption. Figuring Out Your Demand Curve.
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Lecture 5:
Individual and Market Demand
September 29, 2015
Overview
Course Administration
Change in Income and Changes in Consumption
Figuring Out Your Demand Curve
Income and Substitution Effects
Individual Demand to Market Demand
Ripped from the Headlines
As a reminder, next week
Afternoon Finder Presenter Colette Tano Lily Robin
Evening
Finder Presenter Elizabeth Krevsky Alex Severn Kevin Schoenberger Claire Viall
Concepts from Last Class
- (^) Utility
- Indifference curves
- (^) Budget constraint
- Utility maximization
How do Changes in Income Affect Consumption?
- (^) Income effect ≡ change in consumption due to a change in income
- When income increases, what happens to
- location of budget constraint?
How do Changes in Income Affect Consumption?
- (^) Income effect ≡ change in consumption due to a change in income
- When income increases, what happens to
- location of budget constraint? shifts outward
- slope of budget constraint?
How do Changes in Income Affect Consumption?
- (^) Income effect ≡ change in consumption due to a change in income
- When income increases, what happens to
- location of budget constraint? shifts outward
- slope of budget constraint? unchanged, since prices haven’t changed
- shape of indifference curves? nothing!
How do Changes in Income Affect Consumption?
- (^) Income effect ≡ change in consumption due to a change in income
- When income increases, what happens to
- location of budget constraint? shifts outward
- slope of budget constraint? unchanged, since prices haven’t changed
- shape of indifference curves? nothing!
- (^) The consumer gets more utility with more income
Normal and Inferior Goods in Pictures
Find the Inferior Good!
Income Elasticity and Types of Goods
E ID =
%∆Q
%∆I
∆Q
∆I
I
Q
- Sign of E (^) ID for inferior goods?
Income Elasticity and Types of Goods
E ID =
%∆Q
%∆I
∆Q
∆I
I
Q
- Sign of E (^) ID for inferior goods? E (^) ID < 0
- (^) Sign of E (^) ID for normal goods? E (^) ID > 0
Income Elasticity and Types of Goods
E ID =
%∆Q
%∆I
∆Q
∆I
I
Q
- Sign of E (^) ID for inferior goods? E (^) ID < 0
- (^) Sign of E (^) ID for normal goods? E (^) ID > 0
- (^) necessity goods: 0 < E (^) ID < 1
- (^) luxury goods: E (^) ID > 1
- E (^) ID = 0: Income inelastic
Using Income and Utility to Find Your Demand Curve
- (^) Recall that a demand curve shows the quantity demanded at a given price
- (^) In other words, what happens to consumption of X as price changes
- (^) We now have the tools to figure this out for you
- We draw budget constraints and indifferences curves in Y vs X , but we need a P vs X graph for demand