Understanding Own-Price Changes in Demand Functions

1. 6 Demand

2. Properties of Demand Functions • Comparative statics analysis of ordinary demand functions -- the study of how ordinary demands x1*(p1,p2,y) and x2*(p1,p2,y) change as prices p1, p2 and income y change.

3. Own-Price Changes • How does x1*(p1,p2,y) change as p1 changes, holding p2 and y constant? • Suppose only p1 increases, from p1’ to p1’’ and then to p1’’’.

4. Own-Price Changes Fixed p2 and y. x2 p1x1 + p2x2 = y p1 = p1’ x1

5. Own-Price Changes Fixed p2 and y. x2 p1x1 + p2x2 = y p1 = p1’ p1= p1’’ x1

6. Own-Price Changes Fixed p2 and y. x2 p1x1 + p2x2 = y p1 = p1’ p1=p1’’’ p1= p1’’ x1

7. Own-Price Changes Fixed p2 and y.

8. Own-Price Changes Fixed p2 and y. p1 = p1’ x1*(p1’)

9. p1 Own-Price Changes Fixed p2 and y. p1 = p1’ p1’ x1* x1*(p1’) x1*(p1’)

10. p1 Own-Price Changes Fixed p2 and y. p1 = p1’’ p1’ x1* x1*(p1’) x1*(p1’)

11. p1 Own-Price Changes Fixed p2 and y. p1 = p1’’ p1’ x1* x1*(p1’) x1*(p1’) x1*(p1’’)

12. p1 Own-Price Changes Fixed p2 and y. p1’’ p1’ x1* x1*(p1’) x1*(p1’’) x1*(p1’) x1*(p1’’)

13. p1 Own-Price Changes Fixed p2 and y. p1 = p1’’’ p1’’ p1’ x1* x1*(p1’) x1*(p1’’) x1*(p1’) x1*(p1’’)

14. p1 Own-Price Changes Fixed p2 and y. p1 = p1’’’ p1’’ p1’ x1* x1*(p1’) x1*(p1’’) x1*(p1’’’) x1*(p1’) x1*(p1’’)

15. p1 Own-Price Changes Fixed p2 and y. p1’’’ p1’’ p1’ x1* x1*(p1’) x1*(p1’’’) x1*(p1’’) x1*(p1’’’) x1*(p1’) x1*(p1’’)

16. p1 Own-Price Changes Ordinarydemand curvefor commodity 1 Fixed p2 and y. p1’’’ p1’’ p1’ x1* x1*(p1’) x1*(p1’’’) x1*(p1’’) x1*(p1’’’) x1*(p1’) x1*(p1’’)

17. p1 Own-Price Changes Ordinarydemand curvefor commodity 1 Fixed p2 and y. p1’’’ p1’’ p1’ x1* x1*(p1’) x1*(p1’’’) x1*(p1’’) x1*(p1’’’) x1*(p1’) x1*(p1’’)

18. p1 Own-Price Changes Ordinarydemand curvefor commodity 1 Fixed p2 and y. p1’’’ p1’’ p1 price offer curve p1’ x1* x1*(p1’) x1*(p1’’’) x1*(p1’’) x1*(p1’’’) x1*(p1’) x1*(p1’’)

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

20. Own-Price Changes • What does a p1 price-offer curve look like for Cobb-Douglas preferences?

21. Own-Price Changes • What does a p1 price-offer curve look like for Cobb-Douglas preferences? • TakeThen the ordinary demand functions for commodities 1 and 2 are

22. Own-Price Changes and Notice that x2* does not vary with p1 so thep1 price offer curve is

23. Own-Price Changes and Notice that x2* does not vary with p1 so thep1 price offer curve is flat

24. Own-Price Changes and Notice that x2* does not vary with p1 so thep1 price offer curve is flat and the ordinarydemand curve for commodity 1 is a

25. Own-Price Changes and Notice that x2* does not vary with p1 so thep1 price offer curve is flat and the ordinarydemand curve for commodity 1 is arectangular hyperbola.

26. Own-Price Changes Fixed p2 and y. x1*(p1’’’) x1*(p1’) x1*(p1’’)

27. p1 Own-Price Changes Ordinarydemand curvefor commodity 1 is Fixed p2 and y. x1* x1*(p1’’’) x1*(p1’) x1*(p1’’)

28. Own-Price Changes • What does a p1 price-offer curve look like for a perfect-complements utility function?

29. Own-Price Changes • What does a p1 price-offer curve look like for a perfect-complements utility function? Then the ordinary demand functionsfor commodities 1 and 2 are

30. Own-Price Changes

31. Own-Price Changes With p2 and y fixed, higher p1 causessmaller x1* and x2*.

32. Own-Price Changes With p2 and y fixed, higher p1 causessmaller x1* and x2*. As

33. Own-Price Changes With p2 and y fixed, higher p1 causessmaller x1* and x2*. As As

34. Own-Price Changes Fixed p2 and y. x2 x1

35. p1 Own-Price Changes Fixed p2 and y. x2 p1 = p1’ y/p2 p1’ x1* ’ ’ x1 ’

36. p1 Own-Price Changes Fixed p2 and y. x2 p1 = p1’’ p1’’ y/p2 p1’ x1* ’’ ’’ x1 ’’

37. p1 Own-Price Changes Fixed p2 and y. p1’’’ x2 p1 = p1’’’ p1’’ y/p2 p1’ x1* ’’’ ’’’ x1 ’’’

38. p1 Own-Price Changes Ordinarydemand curvefor commodity 1 is Fixed p2 and y. p1’’’ x2 p1’’ y/p2 p1’ x1* x1

39. Own-Price Changes • What does a p1 price-offer curve look like for a perfect-substitutes utility function? Then the ordinary demand functionsfor commodities 1 and 2 are

40. Own-Price Changes and

41. Own-Price Changes Fixed p2 and y. Fixed p2 and y. x2 p1 = p1’ < p2 x1 ’

42. p1 Own-Price Changes Fixed p2 and y. Fixed p2 and y. x2 p1 = p1’ < p2 p1’ x1* ’ x1 ’

43. p1 Own-Price Changes Fixed p2 and y. Fixed p2 and y. x2 p1 = p1’’ = p2 p1’ x1* x1

44. p1 Own-Price Changes Fixed p2 and y. Fixed p2 and y. x2 p1 = p1’’ = p2 p1’ x1* x1

45. p1 Own-Price Changes Fixed p2 and y. Fixed p2 and y. x2 p1 = p1’’ = p2 p1’ x1* x1 ’’

46. p1 Own-Price Changes Fixed p2 and y. Fixed p2 and y. x2 p1 = p1’’ = p2 p2 = p1’’ p1’ x1* x1

47. p1 Own-Price Changes Fixed p2 and y. Fixed p2 and y. p1’’’ x2 p2 = p1’’ p1’ x1* x1

48. p1 Own-Price Changes Ordinarydemand curvefor commodity 1 Fixed p2 and y. Fixed p2 and y. p1’’’ x2 p2 = p1’’ p1 price offer curve p1’ x1* x1

49. Own-Price Changes • Usually we ask “Given the price for commodity 1 what is the quantity demanded of commodity 1?” • But we could also ask the inverse question “At what price for commodity 1 would a given quantity of commodity 1 be demanded?”

50. Own-Price Changes p1 Given p1’, what quantity isdemanded of commodity 1? p1’ x1*