Topic 3: Demand Flashcards
income expansion path
how optimal bundle changes as income changes
engel curve
how optimal consumption of a good changes as income changes
normal good
demand increases when income increases
inferior good
demand decreases when income increases
offer curve
how optimal bundle changes as price changes
demand curve
how optimal consumption of a good changes as price changes
ordinary good
demand decreases when price increases
giffen good
demand increases when price increases
price changes
substitution and income effect
substitution effect
relative price effect
relative price of two goods changes so if p1 falls, good 1 is cheaper relative to good 2
for monotonic preferences, new bundle will include more of good 1 at the expense of good 2
income effect
consumer is richer is p1 falls but p2 and income stay the same
- consumer is ‘richer’
new options are available that were unaffordable before
why do we need both slutsky and hicks?
slutsky is based on observables and not utility
hicks is useful to measure welfare changes and compensation
big model
decision maker chooses most preferred from available options
little model
preferences over bundles of two types of good
