Individual demand and Market demand Flashcards
What is indivdual demand?
can be determined by solving the utility maximization problem.
How does the demand respond to changes
normal good
A good for which demand rises when income rises
inferior good
A good for which demand decreases when income rises
Income expansion path
represents the set of optimal consumption bundles a consumer chooses as their income changes, while keeping prices constant. It shows how a consumer’s choice of different goods changes with varying levels of income.
Engel curve
hows the relationship between a consumer’s income and the quantity of a good or service they demand. As income changes, the Engel curve illustrates how the consumption of a particular good varies.
ordinary good
A good for which demand decreases when the price rises
Giffen good
A good for which demand increases when the price rises
–> For the Giffen good the income effect is larger than the substitution effect
substitutes
Two goods are substitutes when a price increase of one good leads to an increase of the demand for the other good
complements
wo goods are complements when a price increase of one good leads to a decrease of the demand for the other good
Substitution effect (SE)
An individual consumes more of the good that has become relatively cheaper.
→ Response to the change in relative price.
Income effect (IE)
A price shift changes the purchasing power of the individual. They tend to consume more of both goods.
→ Response to the change in purchasing power.
Total effect (TE)
The total effect of a price decrease TE = SE + IE.
The market demand is obtained by (idea)
the aggregation of the individual demands for given prices.
The market demand is obtained by (implementation)
summing up horizontally the individual consumer demands j = 1, …, n for given prices
