chapter 6: demand Flashcards
Marshallian demand functions
The consumer’s Marshallian demand functions give the optimal amounts of each good as a function of the prices and income faced by a consumer
Comparative statics
Comparative statics studies how a choice responds to changes in prices or income.
normal good
A normal good is a good for which demand increases when income increases:
∆x1/∆m> 0.
An inferior good
An inferior good is a good for which demand decreases when income increases:
∆x1/∆m< 0.
Whether a good is inferior or not depends on the income level.
income offer curve
The income offer curve illustrates the bundles of goods that are demanded at different levels of income.
The income offer curve is also known as the income expansion path. If both goods are normal, then the income expansion path will have a positive slope.
Engel curve
The Engel curve is a graph of the demand for one good as a function of income, with all prices being held constant.
luxury good
If the demand for a good goes up by a greater proportion than income, we say that it is a luxury good.
necessary good.
If the demand for a good goes up by a smaller proportion than income, we say that it is a necessary good.
homothetic preferences.
If preferences depend only on the ratio of good 1 to good 2, the consumer has homothetic preferences.
A consumer’s preferences are homothetic if and only if :
(x1, x2) > (y1, y2) <=> (tx1,tx2) > (ty1,ty2) for every t > 0.
Quasilinear preferences
Quasilinear preferences lead to indifference curves that are parallel. If preferences are quasilinear, the demand for good 1 is independent of income.
Giffen goods
The demand for Giffen goods decreases as the price decreases.
reservation price.
At some price r1, the consumer will be indifferent between buying 1 unit of good 1 or not. This price is called the reservation price.
when is a good a substitute?
If the demand for good 1 goes up when the price of good 2 goes up, good 1 is a substitute for good 2.
dx1/ dp2 > 0.
when is a good a complement?
If the demand for good 1 goes down when the price of good 2 goes up, good 1 is a complement to good 2.
dx1/ dp2 < 0.
inverse demand function
The inverse demand function is the demand function viewing price as a function of quantity demanded.
Ordinary goods
The demand for ordinary goods increases as the price decreases.
For ordinary goods, an increase in the price leads to a decrease in demand:
dx1/dp1< 0.
the p1-price offer curve
The curve containing all the utility-maximizing bundles traced out as p1 changes, with p2 and m constant,
The demand curve for good 1
is a plot of the demand function x1(p1, p2, m),
holding p2 and m fixed at some predetermined values.
Suppose that good 1 is a discrete good.
- If p1 is very high, the consumer will buy 0 units of good 1.
- At some price r1, the consumer will be indifferent between buying 1 unit of
good 1 or not. This price is called the reservation price. - If the price falls to r2, the consumer is willing to buy a second unit of good
1.
