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Chapter Six Demand

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Properties of Demand Functions u Comparative statics analysis of ordinary demand functions -- the study of how ordinary demands x 1 *(p 1,p 2,y) and x 2 *(p 1,p 2,y) change as prices p 1, p 2 and income y change.

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Own-Price Changes u How does x 1 *(p 1,p 2,y) change as p 1 changes, holding p 2 and y constant? u Suppose only p 1 increases, from p 1 to p 1 and then to p 1.

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x1x1 x2x2 p 1 = p 1 Fixed p 2 and y. p 1 x 1 + p 2 x 2 = y Own-Price Changes

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x1x1 x2x2 p 1 = p 1 Fixed p 2 and y. p 1 x 1 + p 2 x 2 = y

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Own-Price Changes x1x1 x2x2 p 1 = p 1 Fixed p 2 and y. p 1 = p 1 p 1 x 1 + p 2 x 2 = y

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p 1 = p 1 Own-Price Changes Fixed p 2 and y.

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x 1 *(p 1 ) Own-Price Changes p 1 = p 1 Fixed p 2 and y.

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x 1 *(p 1 ) p1p1 p 1 x1*x1* Own-Price Changes Fixed p 2 and y. p 1 = p 1

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x 1 *(p 1 ) p1p1 p 1 p 1 = p 1 x1*x1* Own-Price Changes Fixed p 2 and y.

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x 1 *(p 1 ) p1p1 p 1 p 1 = p 1 x1*x1* Own-Price Changes Fixed p 2 and y.

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x 1 *(p 1 ) p1p1 p 1 x1*x1* Own-Price Changes Fixed p 2 and y.

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x 1 *(p 1 ) p1p1 p 1 p 1 = p 1 x1*x1* Own-Price Changes Fixed p 2 and y.

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x 1 *(p 1 ) p1p1 p 1 p 1 = p 1 x1*x1* Own-Price Changes Fixed p 2 and y.

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x 1 *(p 1 ) p1p1 p 1 x1*x1* Own-Price Changes Fixed p 2 and y.

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x 1 *(p 1 ) p1p1 p 1 x1*x1* Own-Price Changes Ordinary demand curve for commodity 1 Fixed p 2 and y.

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x 1 *(p 1 ) p1p1 p 1 x1*x1* Own-Price Changes Ordinary demand curve for commodity 1 Fixed p 2 and y.

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x 1 *(p 1 ) p1p1 p 1 x1*x1* Own-Price Changes Ordinary demand curve for commodity 1 p 1 price offer curve Fixed p 2 and y.

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Own-Price Changes u The curve containing all the utility- maximizing bundles traced out as p 1 changes, with p 2 and y constant, is the p 1 - price offer curve. u The plot of the x 1 -coordinate of the p 1 - price offer curve against p 1 is the ordinary demand curve for commodity 1.

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Income Changes u How does the value of x 1 *(p 1,p 2,y) change as y changes, holding both p 1 and p 2 constant?

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Income Changes Fixed p 1 and p 2. y < y < y

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Income Changes Fixed p 1 and p 2. y < y < y

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Income Changes Fixed p 1 and p 2. y < y < y x 1 x 2

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Income Changes Fixed p 1 and p 2. y < y < y x 1 x 2 Income offer curve

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Income Changes u A plot of quantity demanded against income is called an Engel curve.

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Income Changes Fixed p 1 and p 2. y < y < y x 1 x 2 Income offer curve

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Income Changes Fixed p 1 and p 2. y < y < y x 1 x 2 Income offer curve x1*x1* y x 1 y y y

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Income Changes Fixed p 1 and p 2. y < y < y x 1 x 2 Income offer curve x1*x1* y x 1 y y y Engel curve; good 1

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Income Changes Fixed p 1 and p 2. y < y < y x 1 x 2 Income offer curve x2*x2* y x 2 y y y

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Income Changes Fixed p 1 and p 2. y < y < y x 1 x 2 Income offer curve x2*x2* y x 2 y y y Engel curve; good 2

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Income Changes Fixed p 1 and p 2. y < y < y x 1 x 2 Income offer curve x1*x1* x2*x2* y y x 1 x 2 y y y y y y Engel curve; good 2 Engel curve; good 1

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Income Effects u A good for which quantity demanded rises with income is called normal. u Therefore a normal goods Engel curve is positively sloped.

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Income Effects u A good for which quantity demanded falls as income increases is called income inferior. u Therefore an income inferior goods Engel curve is negatively sloped.

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