ch 6 demand

demand functions give us the

optimal amounts of each goods as a function of the prices and incomes

normal goods

those whose demand increases when income increases (dx1/dm > 0)

inferior goods

those whose demand decreases when income increases

income offer curve connects together

the demanded bundles at different shifts of the budget line i.e. different income levels

when good 1 is inferior, income offer and engel curves cure towards

y-axis

engel curve

connecting the demand for one of the goods as a function of income

homothetic preferences

consumer's MRS is the same anywhere on a straight line drawn from the origin

if preferences are homothetic, scalar multiples of a bundle have same preferences as

the original bundle

utility function is homogenous if

u(tx1, tx2) = t•u(x1,x2)

every homogenous utility function models preferences that are

homothetic

luxury good

if demand goes up by a greater proportion than income

necessary good

if demand goes up by a lesser proportion than income

under homothetic preferences, when income is scaled up or down by any amount t > 0

the demanded bundle scales up or down by the same amount

quasilinear preferences have a

zero income effect for good 1; unchanging demand despite income d

quasilinear example

when good 1 is pencils and good 2 is composite good (money spent on everything else)

ordinary good

when the quantity demanded increases as price decreases

price decrease of ordinary good visualized as

flattening of the budget line as vertical intercept is fixed and the horizontal intercept moves to the right

giffen good

demand for it decreases with price because money can be spent on other things while reducing some consumption of good 1

price offer curve

connecting the bundles that would be demanded at different prices of good 1

demand curve

optimal level of x1 consumption plotted for each value of p1 while holding p2 and m fixed

demand curve is downward sloping because

dx1/dp1 < 0, moving in opposite directions

demand curve for perfect substitutes

demand for good 1 is zero when p1>p2, any amount on budget line prices are equal, and m/p1 when p1<p2

demand curve for perfect complements

x1 = m/(p1 + p2)