3- demand Flashcards
deriving D curve if P for one good (x axis) falls
b.c. rotates outwards, new utility maximising quantity of x-axis good, traces out movement along D curve.
budget increase effect
budget line shifts out (parallel, if P kept constant)
engel curve
relates income to Q demanded
income increase on normal good
more of good demanded
income increase on inferior good
less of good demanded
change in price effect
good made relatively more/less expensive, change in real income of consumer
price change effect on D
income effect, substitution effect
income effect
change in purchasing power / real income
substitution effect
change in P = good substituted
direction of income depends on
type of good
if price increases of a normal good, income effect is
negative
if price increases of an inferior good, income effect is
positive
why is direction of substitution always negative
P increase = less of good consumed, substituted w cheaper good
Slutsky equation
TE = SE + IE
income effect dominates if
IE > SE
giffen goods’ D curve slopes
upwards; P increase = demand increased
giffen goods type
inferior
P falls: IE, SE, TE for normal good
(consumption increase) SE +, IE +, TE ++
P falls: IE, SE, TE for inferior good
(consumption increase) SE +, IE -, TE ?
P rise: IE, SE, TE for normal good
(reduce consumption) SE -, IE -, TE –
P rise: IE, SE, TE for inferior good
(reduce consumption) SE -, IE +, TE ?
why can the sign for inferior goods not be predicted
because it depends if IE or SE is stronger
