chapter 6: demand

demand function example - x1 = x1(p1,p2,m)

demand - is a function of prices and income

comparative statics - how choices respond to changes in the environment

inverse demand function - rewrite price as a function of quantity

relationship between normal goods and income - as income increases quantity demanded increases

relationship between inferior goods and 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 only depends on the ratio of good one to good 2; demand for good increases in the same proportion as income

examples of homothetic preferences - perfect substitutes, perfect complements, and cobb douglas functions

if (x1, x2) > (y1, y2) , then - (tx1,tx2) > (ty1, ty2)

giffen good - occurs when a decrease in price causes a decrease in quantity demanded; extremely inferior good with little to no substitutes

lowest degree of product substitutability - ICs look close to perfect complements, demand gets steeper, any given price induces small change in x

highest degree of product substitutability - demand gets flatter, a given change in price induces a large change in x