Week Six: Demand

Question 1

Demand Function

What is a Demand Function

Define Marshallian Demand Function:

Answer 1

• Demand funcitons indicates vector of prices and incomes → determines budget constraints
• “Optimal bundle” → changes with income/price (function of)
  Therefore, Marshallian Demand is useful

Properties: (Using Comparative Statistics Analysis)

Study how Marshallian demand x1(p1, p2,m) and x2(p_1, p_2,m) changes as exogenous prices p1, p2 changes with m

Question 2

Demand Function

Define Own-Price Changing

Answer 2

Own-Price Changing:
How does x1(p1, p2,m) change as p1 changes, holding p2 and m constant?
Refers to the change in price of goods as demand for same good as the price changes → own price effect

See Graphs

Steps:
1. Curves plot changes in price p1 for good one, while keeping p2 and m constant
2. Do the same for p1 => p1’ => p’’
3. Plot initial price p1 on seperate curve -> ordinary demand curve
4. Plot other p1’,p1’’ (note downwards sloping)

Question 3

Own-Price Changing

What is the Price-Offer Curve

Answer 3

Curves contain all utility-maximizing bundles traced out as p1 (keeping other variables constant) → p1-price offer curve

Demand Curve: describes relationship between optimal consumption of good

Question 4

How does the ordinary demand curve relate to the price changing curve?

Answer 4

changes in p1, p1’, p1’’ corresponds to a new consumption of x1 with the new price.
- Note: plots ordinary demand curve
- Downwards sloping → illustrates diminishing marginal return and that you get “less for your buck” for the same good if the price increases

(afford less ⇒ worse off → “poorer” in some sense)