Demand Flashcards
Week 5
1
Q
What curve shows the changes in income? What does this then allow you to construct?
A
- Income Offer curve
- Engel Curve
2
Q
What curve shows the changes in price? What does this then allow you to construct?
A
- Price Offer curve
- Demand Curve
3
Q
What is comparative statics? How do different goods explain increases in income/price?
A
- Study of how demands x * 1 and x * 2 change as income and price change
- If INCOME increases, NORMAL goods increase, INFERIOR goods decrease
- If PRICE increases, ORDINARY goods increase, GIFFEN goods decrease
4
Q
What is the Income Offer Curve? How can this lead to the Engel Curve?
A
- By connecting all optimal points to map how income is changing with demand [budget curve shifts out with price]
- If you plot the optimal choices against income, you can find the Engel Curve
5
Q
What are the slopes of Engel Curves in special scenarios?
A
- Cobb-Douglas: p1/a (a is the Cobb-Douglas power)
- Perfect Substitutes: p1
- Perfect Complements: p1 + p2
6
Q
What are homothetic preferences? What happens to Luxury/Necessity goods?
A
- Demand for the good changes proportionally with respect to the changes in income
- i.e. Perfect Substitutes, Perfect Complements and Cobb Douglas
- Luxury goods have higher demand as income increases
- Necessity goods have less of an increase in demand as income increases
7
Q
What is the Price Offer Curve? How can this lead to the Demand Curve?
A
- By connecting all optimal bundles to map how price is changing with demand [budget curve changes with price]
- If you plot the optimal choices against price, you can find the Demand Curve
8
Q
What is the Inverse Demand curve? What does it illustrate?
A
- Provides more of an interesting thought experiment rather than a concrete economic example
- Measures what the price of X1 would have to be for the consumer to choose that level of consumption.
- In other words, the inverse demand curve shows the consumers marginal willingness to pay for good x1
