Chapter 4 Flashcards
Deriving demand curves, effects of an increase in income, effects of an increase in income, effects of an increase in price, revealed preferences
How do you choose what to purchase with perfect substitutes
If both goods have the same price you buy whatever, buy the cheaper of the two
What is income elasticity?
How much does demand respond to changes in income
What happens when income elasticity is equal to one?
income and the quantity demanded increase by the same amount
When is income elasticity negative?
when we are talking about inferior goods, as income rises you consume less of such goods
When is income elasticity greater than 1?
For luxury goods, the consumption growths faster than the income
What happens if income elasticity is between 0 and one
the good is a necessity
Two parts of the effects of a price increase?
- Income effect: if the price goes up, income is worth less
- Substitution effect: if the price goes up, you switch to buying other goods
For most inferior goods, what is which effect (sub or income) is greater?
substitution effect > income effect
What law do giffen goods violate? why?
They violate the law of demand because the substitution effect < income effect
What is the Hicksian demand curve?
AKA the compensated demand curve, it is how demand varies as price changes and consumer is given enough income to stay on the same IC
Uncompensated vs compensated demand
uncompensated demand depends only on price and income, where as compensated demand depends on utility rather than income
