Microeconomics - Demand

Income offer curve allows ut to?

Understand how the bundles of goods people consume changes as income increases. We can differ from different types of goods:

• Normal goods

• Inferior goods

Normal goods

Goods like coffee and data where people buy more as their income increases, or less of them as their income decreases

Inferior good

Goods like cheap staples, such as sandwich bread, basic rice, or instant noodle: people tend to consume less inferior goods as their income increases, and more of them as their income decreases.

Quasi-linear

Special form of utility, where utility is linear in one good and non-linear in another

Key properties

• Marginal utility of y is constant → MUy =1

• Marginal rate of subsitution(MRS) →o

  • MRT(x,y) = MUx/MUy= MUx/Ux = g’(x)

  • Means: the willingness to trade y for x only depends on x, not on y

  • ! How many dollars a person is willing to pay 1 more unit of x → MRS=1

• MRT

  • Px/Py = Px/1 = Px

    • Means to get 1 more unit of x, you must give up Px unit of y(money). Means the opportunity cost of x measured in money. 

How can market demand be divided into two

o   Individual demand: how much one consumer buys at a given price x(p)

o   Marked demand: the sum of alle individual demands at each price X(p)

Consumer surplus

The difference between your willingness to pay (maximum you’d pay) and the actual price paid is your consumer surplus. 

It measures the net benefit (or welfare) you get form buying the good, expressed in money terms

Market surplus

The total consumer surplus in the whole market = sum of all individual consumers’ surpluses.

Market consumer surplus = the total extra benefit all consumers in the market get, above what they actually pay

• Individual consumer surplus = area between the individual demand curve and the price line.

• Market consumer surplus = area between the market demand curve and the market price.

Differance between expenditure and consumer surplus

• Expenditure = price × quantity = rectangle under the price line.

• Consumer surplus = triangle between demand curve and price line (extra benefit above what she paid).

Step-by-step for any consumer problem

1. Compute MRS=MUy / ​MUx​​

2. MRT= Px/Py

3. Optimal mix consumer can choose → MRT=MRS. This gives a relationship between x and y

4. Solve the relationshop(usually to express y in terms of x). Tells us how much one good you consume relative to other

5. Plug into the budget contraint to solve for x

6. Plug x* back into buget contraint to find y*

7. Budget fraction → spending on x/ total spending

What does a cobb-douglas function tell us under a consumer problem

• u(x,y) = tells us the consumers happiness score form consuming:

  • x units of good x

  • y units og good y

  • The higher u → more satified

• x^a = in between 0 and 1, shows hoe important good x is for the consumer. For instance is a=0,6 - shows the fraction of the budget spent on good x. How important good x is. Same applie for y^1-a

• x^α: how much the person likes good x

• y^1−α: how much the person likes good y

• α and 1−α tell the importance share of each good

• The utility function shows how much happiness the combination of x and y gives