Lecture 4
Individual and Market Demand
It is much easier to comprehend the knowledge with the aid of such graphs.
Individual Demand
Price Changes
Quantity change (moving to a different point on the curve)
Price-Consumption Curve
Income Changes
Income and Substitution Effects.
Normal Good
Substitution Effect
Change in consumption of a good associated with a change in its price, with the level of utility held constant.
Income Effect
Change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant.
\text{Total Effect} (F_1F_2) = \text{Substitution Effect} (F_1E) + Income Effect (EF_2)
Inferior Good
A Special Case of Inferior Good: The Giffen Good
Good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect.
False Example: House price increase (because the income effect is not negative)
Market Demand
From Individual to Market Demand
Just add them up.
Elasticity of Demand
E_p=\dfrac{\Delta Q/Q}{\Delta P/P}=\dfrac{P}{Q}\cdot \dfrac{\Delta Q}{\Delta P}
Demand | If Price Increases, Expenditures | If Price Decreases, Expenditures |
---|---|---|
Inelastic | Increase | Decrease |
Unit elastic | Are unchanged | Are unchanged |
Elastic | Decrease | Increase |
Isoelastic Demand
Consumer Surplus
Difference between what a consumer is willing to pay for a good and the amount actually paid.
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