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Demand

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Consumer Demand Consumer’s demand functions:

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Changes in Income Given Prices

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Normal Goods Both goods 1 and 2 are normal

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An Inferior Good Good 1 is normal. Good 2 is inferior:

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Income Offer and Engel Curves Income Offer Curve Engel Curve

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Cobb-Douglas Demand function for good 1: Demand function for good 2:

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Cobb Douglas Income Offer Curve: Engel Curve:

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Perfect Substitutes Demand function for good 1: if

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Perfect Substitutes (with ) Income Offer Curve: Engel Curve:

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Perfect Complements Optimal choice: Budget line: Demand function for goods 1 and 2:

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Perfect Complements Income Offer Curve: Engel Curve:

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Homothetic Preferences Consumer’s preferences only depend on the ratio of the two goods: If Then, for Example: Cobb-Douglas, Perfect substitutes, Perfect Complements. Properties: straight income offer curve and Engel curve.

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Luxury Good

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Necessary Good

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Changes in Prices Fix income and price of one good and change price of the other.

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Ordinary Goods Price of good 1 decreases. Demand for good 1 increases.

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Giffen Goods Price of good 1 decreases. Demand for good 1 decreases.

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Price Offer and Demand Curves Price Offer Curve: Demand Curve:

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Perfect Complements Price Offer Curve: Demand Curve:

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Substitutes Good 1 is a substitute for good 2 when:

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Complements Good 1 is a complement to good 2:

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Inverse Demand Function Consider a demand function The inverse demand function is Cobb-Douglas example:

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Inverse Demand Curve Optimal choice: Suppose: (composite good) Rearrange:

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