1 / 24

L06

L06. Demand. Review. Model of choice parameters Example 1: Cobb Douglass. Perfect Complements. Perfect complements. We know Focus on one good (x1) How the demand is affected by a change a) in “own” price b) in income c) in price of other commodity

dandre
Download Presentation

L06

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

Presentation Transcript

  1. L06 Demand

  2. Review • Model of choice • parameters • Example 1: Cobb Douglass

  3. Perfect Complements

  4. Perfect complements • We know • Focus on one good (x1) • How the demand is affected by a change a) in “own” price b) in income c) in price of other commodity • One variable at the time!

  5. Own-Price Changes • We focus on good 1 • We hold p2 and m constant. • We change p1 • The change represented by: • Price offer curve • Demand curve

  6. Own-Price Change p1 Vary p1=1, p1’=3, p1’’=4 Fix p2=1 and m=12. x2 Demand curvefor commodity 1 p1 price offer curve p1 (5,7) (2.5,3) (3,3) x1* x1

  7. Own-Price Changes • The curve containing all the utility-maximizing bundles traced out as p1 changes, with p2 and m constant, is the p1- price offer curve. • The plot of optimal choice of x1 against p1 is the demand curve for commodity 1.

  8. Ordinary and Giffen goods p1 x1*

  9. Ordinary and Giffen Goods • A good is called ordinary if the quantity always increases as the price decreases. • If, for some values of the price, the quantity demanded rises as the price increases, then the good is called Giffen.

  10. Two examples We find price offer and demand curve for • Cobb-Douglas preferences • Perfect complements • In both cases we keep fixed

  11. Cobb-Douglass example Data , variable

  12. Perfect Complements Data , variable

  13. Summary: • Price offer curve - Cobb-Douglas – flat line - Perfect Complements – optimal proportion line • Demand curve - Cobb-Douglas – downward slopping - Perfect Complements – downward slopping Conclusion: both ordinary goods • Preferences generating Giffen good?

  14. Giffen Good Demand curve has a positively sloped part x2 p1 price offer curve p1 Û Good 1 isGiffen x1 x1*

  15. Income Changes • We still focus on good 1 • We hold p1 and p2 constant. • We change m • The change represented by: • Income offer curve • Engel curve

  16. Income Changes Vary m=12, m’=6, m’’=4 Fix p1=1, p2=1 x2 Engel curvefor commodity 1 income offer curve m (5,7) (3,3) (2,2) x1* x1

  17. Goods • A good for which quantity demanded rises with income is called normal. (positive slope of Engel curve) • A good for which quantity demanded falls as income increases is called income inferior. (negative slope of Engel curve)

  18. Two examples We find income offer and Engel curve for • Cobb-Douglas preferences • Perfect complements • In both cases we assume

  19. Cobb-Douglass example Data , variable

  20. Perfect Complements Data , variable

  21. Summary: • Income offer curve - Cobb-Douglas – ray from origin - Perfect Complements – optimal proportion line • Engel curve - Cobb-Douglas – upward slopping - Perfect Complements – upward slopping Conclusion: both normal goods • Preferences generating inferior good: textbook.

  22. Cross-Price Effects • If an increase in p2 • increases demand for commodity 1 then commodity 1 is a gross substitute for commodity 2. • reduces demand for commodity 1 then commodity 1 is a gross complement for commodity 2.

  23. Cobb Douglas example Gross complements of substitutes?

  24. Perfect Complements example Gross complements

More Related