Chap.5 : Applying Consumer Theory Flashcards
Deriving Demand Curves
We use consumer theory to derive demand curves, showing how a change in price causes a shift along a demand curve.
1.) Also, we use information about tastes from indifference curves.
How do changes in Income Shift Demand Curves?
We use consumer theory to determine how a demand curve shifts due to a change in income.
What are the effects of a price change on demand?
There are two effects that a change in price has on demand. On concerns changes in relative prices and the other concerns a change in the consumer’s opportunities.
Cost-of-Living Adjustments
Using this analysis of the two effects of price changes, we show that the CPI overestimates the rate of inflation.
Deriving Labor Supply Curves
Using consumer theory to derive the demand curve for leisure, we can derive workers’ labor supply curves and use them to determine how a reduction in the income tax rate affects labor supply and tax revenues.
Engel Curve
The relationship between quantity demand of a single good and income, holding prices constant.
Normal Good
A commodity of which as much or more is demanded as income rises.
Inferior Good
A commodity of which less is demand as income rises.
What can we use income elasticity’s to estimate?
Income elasticity’s can be used to summarize the shape of the Engel curve, the shape of the income consumption curve, or the movement of the demand curves when income increases.
How is income elasticity defined?
(% change in Q demanded) / ( % change in Income)
Substitution Effects
The change in the quantity of a good that a consumer demands when the good’s price changes, holding other prices and the consumer’s utility constant.
Income Effects
The change in the quantity of a good a consumer a consumer demands because of a change in income, holding prices constant.
