chapter 6: demand

Demand Function

A function of prices and income represented as x1 = x1(p1, p2, m).

Comparative Statics

The analysis of how choices respond to changes in the environment.

Inverse Demand Function

A function that expresses price as a function of quantity.

Normal Goods Relationship with Income

As income increases, quantity demanded increases.

Inferior Goods Relationship with Income

As income increases, the quantity demanded decreases because consumers switch to a better alternative.

Examples of Inferior Goods

Flights with layovers and long distance bus travel.

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.

Examples of Homothetic Preferences

Perfect substitutes, perfect complements, and Cobb Douglas functions.

Giffen Good

An extremely inferior good where a decrease in price causes a decrease in quantity demanded due to lack of substitutes.

Lowest Degree of Product Substitutability

Indifference curves look close to perfect complements

demand gets steeper

small price changes induce small changes in quantity.

Highest Degree of Product Substitutability

Demand gets flatter

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