Lecture 4

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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

Effect of Price Changes

Income Changes

Income Change

Income and Substitution Effects.

Normal Good

Curve for 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

Cureve of 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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