U2
Food (units per month)
4
Chapter 4
12
20
Slide 5
Effect of a Price Change
Clothing (units per month) The price-consumption curve traces out the utility maximizing market basket for the various prices for food.
Chapter 4
Slide 9
Effect of a Price Change
Price of Food
When the price falls: Pf/Pc & MRS also fall
E
$2.00
G $1.00
•E: Pf/Pc = 2/2 = 1 = MRS •G: Pf/Pc = 1/2 = .5 = MRS •H:Pf/Pc = .5/2 = .25 = MRS Demand Curve

Chapter 4
Slide 15
Individual Demand
Normal Good vs. Inferior Good

Income Changes

When the income-consumption curve has a positive slope: The quantity demanded increases with income. The income elasticity of demand is positive. The good is a normal good.

e.g. movie tickets and video rentals
Slide 23
Chapter 4
Individual Demand
Slide 17
Chapter 4
An Inferior Good
Steak15 (units per month)
C Income-Consumption Curve Both hamburger and steak behave as a normal good, between A and B...
10
U3
5
B
U2 A U1
…but hamburger becomes an inferior good when the income consumption curve bends backward between B and C.
5
Chapter 4
10
20
Hamburger 30 (units per month)
Entertainment
700
947
1725 2170
1274
2253 2371
1514
3243 2536
2054
4454 2137
2654
5793 1540
4300
9898 1266
Owned Dwellings 1116 Rented Dwellings1957
Health Care
Food Clothing
$1.00
E
G
H
D3 D2 D1
4
Chapter 4
10
16
Food (units per month)
Slide 13
Individual Demand

Income Changes
The
income-consumption curve traces out the utility-maximizing combinations of food and clothing associated with every income level.
1031
2656 859
1697
3385 978
1918
4109 1363
1820
4888 1772
2052
5429 1778
2214
6220 2614
2642
8279 3442
Individual Demand
Substitutes and Complements
1) Two goods are considered substitutes if an increase (decrease) in the price of one leads to an increase (decrease) in the quantity demanded of the other.
Chapter 4
Slide 14
Individual Demand

Income Changes

An increase in income shifts the budget line to the right, increasing consumption along the income-consumption curve. Simultaneously, the increase in income shifts the demand curve to the right.
Slide 2
Topics to be Discussed

Network Externalities Empirical Estimation of Demand
Chapter 4
Slide 3
Individual Demand

Price Changes

Using the figures developed in the previous chapter, the impact of a change in the price of food can be illustrated using indifference curves.
10
0
Chapter 4
4
8
12
16
Food (units per month)
Slide 20
Engel Curves
Income ($ per month) 30
Inferior 20
Engel curves slope backward bending for inferior goods.
G $1.00 Demand Curve
$.50
H
Food (units per month)
4
Chapter 4
12
20
Slide 7
Individual Demand
The Individual Demand Curve

Two Important Properties of Demand Curves 1) The level of utility that can be attained changes as we move along the curve.
Slide 16
Chapter 4
Individual Demand
Normal Good vs. Inferior Good

Income Changes

When the income-consumption curve has a negative slope: The quantity demanded decreases with income. The income elasticity of demand is negative. The good is an inferior good.
Chapter 4
Slide 11
Effects of Income Changes
Clothing (units per month) Assume: Pf = $1 Pc = $2 I = $10, $20, $30
7 5 3
A B U1 U2
Income-Consumption Curve D U3 An increase in income, with the prices fixed, causes consumers to alter their choice of market basket.
4
Chapter 4
10
16
Food (units per month)
Slide 12
Effects of Income Changes
Price of food
An increase in income, from $10 to $20 to $30, with the prices fixed, shifts the consumer’s demand curve to the right.
Chapter 4 Individual and Market Demand
Topics to be Discussed

Individual Demand Income and Substitution Effects Market Demand Consumer Surplus
Chapter 4
If the good is an inferior good, the Engel curve is downward sloping.

Chapter 4
Slide 19
Engel Curves
Income ($ per month) 30
20
Engel curves slope upward for normal goods.
Chapter 4