1 / 19

Individual Demand

Individual Demand. How Does the Best Affordable Bundle Change when the Prices or the Income Change . Optimal Consumer Choice. Assume consumer’s preferences over bundles of two goods, x and y, can be represented by a utility function U(x,y). The prices of the two goods are

javier
Download Presentation

Individual Demand

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. Individual Demand How Does the Best Affordable Bundle Change when the Prices or the Income Change

  2. Optimal Consumer Choice • Assume consumer’s preferences over bundles of two goods, x and y, can be represented by a utility function U(x,y). • The prices of the two goods are • Consumer’s income is I. • The optimal bundle will be a solution to the following problem:

  3. Best Affordable Bundle • Assuming convexity and “more-is-better” properties, plus some other technical assumptions, an interior solution will satisfy: • In words: the marginal rate of substitution between the two goods is equal to the ratio of prices and all the income is spent on purchases of the two goods.

  4. Corner Solutions: Perfect Substitutes y • If the goods are perfect substitutes, so that the marginal rate of substitution is constant no matter how much of each one of the goods the consumer has, the best affordable bundle may contain only one of the goods. 5 x

  5. Marginal Rate of Substitution may not be well defined: Perfect Complements • If the goods are perfect complements, so that a consumer uses, say, 5 units of good y for every unit of good x, the best affordable bundle will always contain a fixed proportion of goods independent of the ratio of prices. y x

  6. Income Changes • Income Expansion Path traces the changes in the composition of the best affordable bundle as the income changes • The Engel Curve is the relationship between the income and the amount of a good consumed

  7. Income Expansion Path

  8. Superior Goods As the consumer’s income increases, the quantity demanded increases

  9. Superior and Inferior Goods A good is inferior if the quantity demanded falls with the consumer’s income

  10. Income and Tastes

  11. Price Consumption Path • Holding income and price of the second goodfixed, the Price Consumption Path for good one is the set of best affordable bundles as the price of this good varies.

  12. Price-Consumption Path

  13. Individual Demand Curve • The individual demand curve is the relationship that shows how much of a good the consumer wants to purchase when the price of this good varies and the rest of the prices and the income are held constant.

  14. Figure 3.7 Demand Curve for Good 1

  15. Income and Substitution Effects

  16. The resulting Demand

  17. Income and Substitution Effects Work in Opposite Directions

  18. Figure 3.13 Giffen Good

  19. Compensating for Price Changes:“overcompensation”

More Related