1. Robin Naylor, Department of Economics, Warwick X X Px a a b â The total effect of the price change is to move the consumer’s choice from ‘a’ to ‘â’. If we plot this into the lower diagram, what are we plotting? Deriving demand curves 1 Topic 1 Lecture 7

2. Robin Naylor, Department of Economics, Warwick X X Px a a b â The total effect of the price change is to move the consumer’s choice from ‘a’ to ‘â’. If we plot this into the lower diagram, what are we plotting? â 2 Topic 1 Lecture 7

3. Robin Naylor, Department of Economics, Warwick X X Px a a b â The total effect of the price change is to move the consumer’s choice from ‘a’ to ‘â’. If we plot this into the lower diagram, what are we plotting? â ? 3 Topic 1 Lecture 7

4. Robin Naylor, Department of Economics, Warwick X X Px a a b â The total effect of the price change is to move the consumer’s choice from ‘a’ to ‘â’. If we plot this into the lower diagram, what are we plotting? â What can you say about the slope of this curve? Must it be –ve? CMIDC 4 Topic 1 Lecture 7

5. Robin Naylor, Department of Economics, Warwick X X Px a a b â The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. If we plot this into the lower diagram, what are we plotting? b S S ? 5 Topic 1 Lecture 7

6. Robin Naylor, Department of Economics, Warwick X X Px a a b â The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. If we plot this into the lower diagram, what are we plotting? b S S CUDC/CRIDC 6 Topic 1 Lecture 7

7. Robin Naylor, Department of Economics, Warwick X X Px a a b â The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. b S S CUDC/CRIDC Must this curve have a –ve slope? 7 Topic 1 Lecture 7

8. Robin Naylor, Department of Economics, Warwick X X Px a a b â The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. b S S CRIDC The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. I I 8 Topic 1 Lecture 7

9. Robin Naylor, Department of Economics, Warwick X X Px a a b â The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. b S S CRIDC The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. I I â CMIDC 9 Topic 1 Lecture 7

10. Robin Naylor, Department of Economics, Warwick X X Px a a b â The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. b S S CRIDC The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. I I â CMIDC The difference between the CRIDC and the CMIDC is the Income Effect. In this diagram, X is a Normal Good. Therefore, the CMIDC is more elastic than the CRIDC 10 Topic 1 Lecture 7

11. Robin Naylor, Department of Economics, Warwick X X Px a a b â The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. b S S CRIDC The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. I I â CMIDC The difference between the CRIDC and the CMIDC is the Income Effect. In this diagram, X is a Weakly Inferior Good. Therefore, the CMIDC is less elastic than the CRIDC 11 Topic 1 Lecture 7

12. Robin Naylor, Department of Economics, Warwick X X Px a a b â The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. b S S CRIDC The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. I I â CMIDC ? The difference between the CRIDC and the CMIDC is the Income Effect. In this diagram, X is a Strongly Inferior Good. Therefore, the CMIDC is +vely sloped. 12 Topic 1 Lecture 7

13. Robin Naylor, Department of Economics, Warwick X X Px a a b â The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. b S S CRIDC The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. I I â CMIDC The difference between the CRIDC and the CMIDC is the Income Effect. In this diagram, X is a Strongly Inferior Good. Therefore, the CMIDC is +vely sloped. (Giffen Good) 13 Topic 1 Lecture 7

14. Robin Naylor, Department of Economics, Warwick Topic 1: Lecture 7 14 Keep working at B&B 4 th Ed., pp. 151-171 (and don’t worry about issues (especially the mathematical material) which go beyond what you have seen in lecture notes or seminar exercise sheets)