chapter 6: demand

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11 Terms

1
Demand Function
A function of prices and income represented as x1 = x1(p1, p2, m).
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2
Comparative Statics
The analysis of how choices respond to changes in the environment.
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3
Inverse Demand Function
A function that expresses price as a function of quantity.
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4
Normal Goods Relationship with Income
As income increases, quantity demanded increases.
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5
Inferior Goods Relationship with Income
As income increases, the quantity demanded decreases because consumers switch to a better alternative.
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6
Examples of Inferior Goods
Flights with layovers and long distance bus travel.
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7
Homothetic Preferences
Consumer preference depends only on the ratio of good one to good two; demand for the good increases in the same proportion as income.
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8
Examples of Homothetic Preferences
Perfect substitutes, perfect complements, and Cobb Douglas functions.
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9
Giffen Good
An extremely inferior good where a decrease in price causes a decrease in quantity demanded due to lack of substitutes.
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10
Lowest Degree of Product Substitutability

Indifference curves look close to perfect complements

demand gets steeper

small price changes induce small changes in quantity.

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11
Highest Degree of Product Substitutability

Demand gets flatter

a given change in price induces a large change in quantity.

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