Price And Income Changes Flashcards
Draw me substitutes in consumption graph
Draw me price increase of a complement
Draw me complements in consumption
A change in consumers income changes what?
Their optimal consumption choices
What are some comparative statics analysis that we can do?
construct an income-consumption curve linking changes in income and consumption
Which tells us how consumption varies with increased income.
The relationship between income and consumption of a good is called?
The Engel curve
Draw me the Engel Curve
As income goes up.. for a normal good?
Consumption increases
As income goes up… for an inferior good?
Consumption decreases
Price and income changes using calculus
Substitution
Draw me an own price change
Two budget constraints 2 utility curves movement from left constraint to right constraint
When does a budget constraint increase?
When there is an increase in consumer’s income or a fall in the price of a good
How do we derive. A consumers demand curve from own price change graph?
Measure consumption of good at different price.
Draw a curve through the new optimal bundle points
Then use the points of intersection between curve and budget constraint to transfer down onto a demand curve.
Use price of good on the y axis
How is the Engel curve formed?
Derived from indifference curves & budget constraints on income-consumption curve.
Engel curve upward sloping
An income change leads to a shift in ..?
The demand curve (derived from intersection to I-C curve and budget constraint)
Examples of a normal good?
Holiday, restaurant meals, electronics
Examples of an inferior good?
Used cars, instant noodles, discount store clothing
What is interesting about demand for fast food meals & income?
Typical US demand for fast food meals increases w income but only up to Y = 60K
Then it decreases as income increases further
Initially normal goods then become inferior
What shape is the Engel curve?
Depends on income consumption curve
So what does a fast food Engel curve look like?
A backwards bending curve
How to calculate market demand?
Add up amount of goods at one price across demand curves
Or
Compute total demand by adding the demand functions (wi the substituted income) of two people together
Then inverse demand to make y =mx +c
