ECON201 Lecture Notes - Lecture 4: Giffen Good, Externality, Economic Surplus

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9 Aug 2016
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ECON 201 – Chapter #4 Notes
A decrease in the price of food, with income and the price of clothing fixed,
causes the consumer to choose a different market basket.
 A decrease in the price of food causes the budget line to rotate
outwards. Thus, we can obtain a higher utility level, and if price drops
again, budget line rotates outward again
A, B, & D are 3 optimal baskets the only thing that changes is the budget
line. If we connect A, B and D we get the price consumption curve
Part (b) gives the individual demand curve, which relates the price of
food to the quantity demanded. (Points E, G, and H correspond to points A,
B, and D, respectively).
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Price-consumption curve - Curve tracing the utility-maximizing
combinations of two goods (i.e., the optimal basket) as the price of one good
changes.
Individual demand curve - Curve relating the quantity of a good that a
single consumer will buy to its price.
Summarize key points
When the price of food decreases:
1. The consumption of food will increase.  We know this, if P then
Qd
2. The consumption of clothing may increase or decrease.
3. The utility increases and MRS decreases along the individual demand
curve.  Normal diminishing returns
4. At everyone point along the individual demand curve, the QD of food is
the utility maximizing amount.  We know this because recall that
the individual demand curve is derived from the price-
consumption curve (which shows the utility maximizing bundles
as price of one good changes) THUS ALL the points in the
individual demand curve are utility maximizing.
5. Over the downward sloping portion of the price consumption curve (i.e.
A to B), clothing and food are substitutes. Over the upward sloping
portion (B to D), clothing and food are complements.
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An increase in income, holding constant the prices of all goods, causes
consumers to change their choice of market baskets.  Since we know that
when income increases, demand curve shifts rightward
A, B, & D are 3 optimal baskets the only thing that changes is the budget
line.
(Point A, income=$10; point B, income=$20; point D, income=$30) trace out
the income-consumption curve.  Income consumption curve is the
puple curve we get by joining A, B, and D.
Demand curve shifts rightward in response to the increases in income, shown
in (b). (Points E, G, and H correspond to points A, B, and D, respectively.) 
bottom are individual demand curves
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