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Lecture Microeconomics: Chapter 5 - Besanko, Braeutigam

Lecture Microeconomics (5th edition): Chapter 5 - The theory of demand. This chapter presents the following content: Individual demand curves, income and substitution effects & the slope of demand, constructing market demand. | 1 The Theory of Demand Chapter 5 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Five Overview Individual Demand Curves Income and Substitution Effects & the Slope of Demand Applications: The Work-Leisure Trade-off Consumer Surplus Constructing Market Demand Chapter Five Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Five Overview The Effects of a Change in Price Optimal Choice Demand Curve Chapter Five Copyright (c)2014 John Wiley & Sons, Inc. 4 Individual Demand Curves In Chapter 4, consumer’s optimal basket was determined. Thus, we can tell – for a given income and prices of other goods – how much a consumer will demand of X for a given price of X. This is a point on the consumer’s demand curve. We can find more points on the demand curve for X by changing the price of X and determining how much of X the consumer will demand – prices of other goods and income are held constant. Chapter Five Copyright (c)2014 John Wiley & Sons, Inc. 5 Is the set of optimal baskets for . | 1 The Theory of Demand Chapter 5 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Five Overview Individual Demand Curves Income and Substitution Effects & the Slope of Demand Applications: The Work-Leisure Trade-off Consumer Surplus Constructing Market Demand Chapter Five Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Five Overview The Effects of a Change in Price Optimal Choice Demand Curve Chapter Five Copyright (c)2014 John Wiley & Sons, Inc. 4 Individual Demand Curves In Chapter 4, consumer’s optimal basket was determined. Thus, we can tell – for a given income and prices of other goods – how much a consumer will demand of X for a given price of X. This is a point on the consumer’s demand curve. We can find more points on the demand curve for X by changing the price of X and determining how much of X the consumer will demand – prices of other goods and income are held constant. Chapter Five Copyright (c)2014 John Wiley & Sons, Inc. 5 Is the set of optimal baskets for every possible price of good x, holding all other prices and income constant. The Price Consumption Curve of Good X: Chapter Five Individual Demand Curves Copyright (c)2014 John Wiley & Sons, Inc. 6 Y (units) X (units) 0 PX = 4 PX = 2 PX = 1 XA=2 XB=10 XC=16 • • • 10 PY = $4 I = $40 Price Consumption Curve 20 The price consumption curve for good x can be written as the quantity consumed of good x for any price of x. This is the individual’s demand curve for good x. Chapter Five Price Consumption Curves Copyright (c)2014 John Wiley & Sons, Inc. 7 X PX XA XB XC Individual Demand Curve For X PX = 4 PX = 2 PX = 1 • • • U increasing Chapter Five Individual Demand Curve Copyright (c)2014 John Wiley & Sons, Inc. 8 The consumer is maximizing utility at every point along the demand curve The marginal rate of substitution falls along the demand curve as the price of x falls (if there was an interior solution). As the price of x falls, it causes the consumer to move down and to the right along the .