Individual And Market Demand Flashcards
What is the income holding prices constant
The point at which the budget constraint curve crosses the y axis
What does an Engel curve show
The relationship between an increased demand and income
How is demand for normal goods affected by income
It increases one for one or less
How is demand for inferior goods affected by an increase in income
Demand decreases
What is the income elasticity of normal goods
0-1
What is the income elasticity of luxury goods
More than one
What are those goods whose share of expenditure rises slower than income called
Necessity goods
How is the demand curve constructed for an individual
By observing how the utility maximization function is affected by changes in price
How can the demand curve be changed for an individual
If income changes and if preferences change
How can the total effect of a change on a quantity demanded be broken down
The substitution effect and the income effect
What is the substitution effect in the supply demand model
How preferences shift away from options that are relatively more expensive to its substitutes
What is the income effect in the supply demand model
How demand changes when more options are available due to people buying less inferior goods and more luxury
What are giffen goods
A good that gains increased demand when prices rise or that gains less demand when prices fall
When are goods substitutes and complementd
If demand falls when prices for others rise they are complements but the reverse is true for substitutes
How do you calculate market demand
By aggregating all individual demands in the market
What variables are held constant too see the income effect
Relative prices
What is the difference between an income expansion path and an Engel curve
The income expansion path shows how the optimal ratio between two goods change with income while the engel curve shows how the quantity consumed changes with income
When price of a good increases will the substitution effect be negative
Yes and the opposite if it decreases as demand goes to the relatively cheeper substitute
Will the willingness to buy an inferior good decrease when prices rise due to the income effect
No as people get poorer they buy more inferior but this is offset by substitution
Explain how you separate a income effect and substitution effect
First you calculate substitution effect by the following process. First you draw the new budget line by drawing it from same price y to new price x. Than you see how demand changes if relative income were constant by moving the new curve to tangent the old indifference curve. The interval between the tangent at new curve at the old income and the old tangent is the substitution effect. The income effect is the space between the substitution point and the result of the new indifference curve tangenting the real new budget line.
