Individual Demand Curve

Question 1

Concerning a Budget Change along the x-axis(fall in price of good x), what is the effect on consumption?

Answer 1

• As the Budget is increased, your consumption would increase from x1 to x2

Question 2

If you connect all points on all indifference curves and budget constraints, what do you get (\) ?

Answer 2

• Price-Consumption Curve of a good
• This is just a Demand Curve

Question 3

Concerning an Income Change, what is the effect on the Budget line?

Answer 3

• There is a parallel shift from B0 to B1

Question 4

What Is the Income Effect?

Answer 4

• The total effect of a change in price that results from the associated change in real purchasing power

Question 5

If you connect all points on all indifference curves and budget constraints, what do you get (/) ?

Answer 5

• Income-Consumption Curve of a good
• ICC=PCC for changes in income
• This is also an Engel curve

Question 6

Explain the Income Effect Using Graphical Reference

Answer 6

• From B0 to B1, relative price of good x is constant
• This means that only a change in income will affect purchasing power, thus reducing consumption

Question 7

What is the Substitution Effect?

Answer 7

• The total effect of a change in price that results from the associated change in the relative price of goods

Question 8

Explain the Substitution Effect Using Graphical Reference

Answer 8

• From B0 to B1, relative price of good x increases
• Purchasing power also falls too
• B’ allows consumers to gain the same utility but at a new price point
• Consumers Substitute away from good x towards good y

Question 9

What is a Normal good?

Answer 9

• A good that as Income increases, so does consumption
• As dP>0, the Substitution Effect and the Income Effect are both negative
• There is a large negative Effect from S0 to S1

Question 10

What is an Inferior Good?

Answer 10

• A good that as Income increases, Consumption decreases
• As dP>0, the Substitution Effect is Negative, whilst the Income Effect is Positive
• There is a smaller negative Effect from S0 to S1

Question 11

Why is Elasticity good?

Answer 11

• It is not affected by units

Question 12

Elasticity when |E|>1 is …

Answer 12

• Elastic

Question 13

Elasticity when |E|<1 is …

Answer 13

• Inelastic

Question 14

What are the different elasticities at each point on the curve

Answer 14

• At the top, |E|>1
• In the middle, |E|= 1
• At the bottom, |E|<1
• As the elasticities affect expenditures differently, expenditure is maximised when |E|= 1