CAS EC 201 Lecture Notes - Lecture 10: Utility, Inferior Good, Normal Good
Document Summary
Effects of changes in income and prices on optimum consumer choices: demandfunctionsforgoodsforan individual consumer! , p y x and i, we can calculate x given individual"s utility function. , the optimal quantity of x demanded, for a. Individualdemandfunctionsarehomogeneousof degree zero in all prices and i. That is, if all prices and income double, x if i = p y, then 2i = 2p x+2p x+p x y x y will not be affected. On the graph of the budget constraint. I and p p will xy not change if both numerator and denominator are multiplied by 2 or any other constant (t). Preferences do not change, ie. , indifference curves do not change with changes in prices or income. So if all prices and income move together, no change in y and y x. Changes in income ceteris paribus prices and preferences (utility function) Changes in income shift the budget constraint parallel because prices are assumed not to change.