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Chapter 6

Chapter 6.docx

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ECON 2201

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Chapter 6 – Demand Demand functions give us the optimal amounts of each of the goods as a function of the consumers’prices and income Normal goods – the demand for the good increases when income increases ∆ x - 1>0 is a normal good ∆m Inferior goods – when in increase in income results in a reduction in the consumption of a good An increase in income leads to a shift of the budget line outward  you can construct an income offer curve by connecting the demanded bundles as the budget line shifts outward Engel curve – a graph of the demand for one of the goods as a function of income with all prices being held constant (made by holding the prices of goods 1 and 2 fixed and looking at how demand changes as we change income) Luxury good – when the demand for a good goes up by a greater proportion than income Necessary good – when the demand for a good goes up by a lesser proportion than income Homothetic preferences – when the consumer’s preferences only depend on the ratio of good 1 to good 2, which means if they prefer (x1, x2) to (y1, y2), they also prefer (2x1, 2x2) to (2y1, 2y2) – perfect subs, comps, and Cobb-Douglas are all examples. - Income offer curves will all be straight lines through the origin, which implies that the Engel curves will also be straight lines through the origin o If you double income, you just double the demand for each good Quasiliner – all indifference curves are shifted versions of one indifference curve - Utility function: u(x1, x2) = v(x1) + x2 - Increasing income doesn’t change demand for good 1, and all the extra income goes to the consumption of good 2 when (x1*, x2*) shifts to (x1*, x2* + k) so the Engel curve for good 1 is a vertical line When we hold income and the price of good 2 constant, the demand for good 1 should increase when its price decreases, which is a normal case. - Price of good 1 decreases, the budget line gets fl
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