Week 4 and 5 chapter notes

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Department
Economics for Management Studies
Course
MGEB02H3
Professor
A.Mazaheri
Semester
Summer

Description
Chapter 4 Individual and Market Demand Notes 4.1 Individual Demand The Individual Demand Curve N price-consumption curve curve tracing the utility-maximizing combinations of two goods as the price of one changes N this pattern of increasing consumption of a good in response to a decrease in price almost always holds N individual demand curve curve relating the quantity of a good that a single consumer will buy to its price N this demand curve has two important properties: 1) The level of utility that can be attained changes moving along the curve. The lower the price of the product, the higher the level of utility. A higher indifference curve is reached as the price falls. 2) At every point on the demand curve, the consumer is maximizing utility by satisfying the condition that the marginal rate of substitution (MRS) of one good for the other good equals the ratios of the prices of good 1 and good 2. Because the consumer is maximizing utility, the MRS of good 1 for good 2 decreases moving down the demand curve. Income Changes N income-consumption curve curve tracing the utility-maximizing combinations of two goods as a consumers income changes N because every demand curve is measured for level of income, any change in income must lead to shift in the demand curve itself N the upward-sloping income-consumption cure implies that an increase in income causes a shift to the right in the demand curve Normal versus Inferior Goods N when the income-consumption curve has a positive slope, the quantity demanded increases with income N as result, income elasticity of demand is positivethe greater the shifts to right of demand curve, the larger the income elasticity N in this case, the goods are described as normal: consumers want to buy more of them as their incomes increase N in some cases, the quantity demanded falls as income increases; the income elasticity of demand is negativeinferior good Engel Curves N Engel curve curve relating the quantity of a good consumed to income N the upward-sloping Engel curvelike the upward-sloping income-consumption curveapplies to all normal goods Substitutes and Complements N for many goods, demand is related to the consumption and price of other goodscomplement goods N other goods tend to substitute for one anothersubstitute goods N two goods are substitutes if an increase in the price of one leads to an increase in the quantity demanded of the other N two goods are complements if an increase in the price of one good leads to a decrease in the quantity demanded of the other N two goods are independent if a change in the price of one good has no effect on the quantity demanded of the other 4.2 Income a
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