AutoSave (. Off) H - 0 2 8 Individual and Market Demand.pptx Search Sign in File Home Insert Draw Design Transitions Animations Slide Show Review View Add-ins Help Foxit Reader PDF Share Comments 1 INDIVIDUAL AND MARKET DEMAND, CH. 4 Individual Demand individual Demand Can, C . The graph on the left panel shows how lo an individual's demand curve can be derived. 13 . As the price of good on the X-axis falls, PCC Application the budget line rotates and the optimal 3 57 Pizza Slices, S consumption bundle changes. The new bundle has a higher consumption of good X. (Top graph) Price of 4 . Joining the optimal consumption bundles gives the Price Consumption Curve, PCC. $2 Dave's Demand Curve . PCC is a curve tracing the utility- for Pizza slices maximizing combinations of two goods Demand as the price of one changes. 5 Q of Pizza Slices Changer Hero Good . The demand curve, as shown in the bottom graph, is derived by using the prices and corresponding quantities in the optimal consumption bundles. 6 Income and Substitution Effects of a = 3 pizza slices. price Change 3. Let the price of a pizza slice fall to $1/slice > the budget line rotates as shown in the graph (review this from the previous chapter) 4. Now Dave maximizes his utility subject to the (new) budget constraint, and chooses consumption bundle, Oz . 5. Joining the optimal consumption bundles, we get the 'Price Consumption Curve'. PCC identifies the optimal market basket associated with each possible price of pizza slices, holding constant all other determinants of demand. income and 6. Also, we get another point on the demand curve - which shows the quantity demanded of 7 units when the price falls to $1. 7. Hence we can derive the demand curve by using different prices, and checking on the optimal consumption points. Note: Optimality is shown in the demand curve. Every point on the demand curve shows Dave's optimal consumption of the good (that is, what maximizes utility given the budget constraint)! Slide 2 of 23 Notes 19 88 + 82%AutoSave C Off) H Search Sign in Refer to the graph in Slide 2. What happens to the consumer's utility as the price of good X falls while the price of good Y, and income stay the same? 1 point Pizza Slices, S bundle has a higher consumption of Price of good X. (Top graph) . Joining the optimal consumption bundles emand Curve Consumer's utility stays the same. Pizza Slices Consumer's utility decreases. Consumer's utility increases. It cannot be determined from the is shown in th graph. , and chooses 5. Joining the optimal consumption bundles, we get the 'Price Consumption Curve'. P all other determinants of demand. Income and or a thes Change: . Also, we get another point on the demand curve - which shows the quantity demanded of / units when the price falls to $1. 7. Hence we can derive the demand curve by using different prices, and checking on the optimal consumption points.Which of the following would be true for a demand curve? [Choose all that apply] Ipoint . The demand curve shows a relationship between the price of a good and some random quantity demanded. The demand curve shows a relationship between the price of a good and quantity demanded in the optimal consumption bundle. . The demand curve is derived using the information from the price consumption curve. Refer to the graph in Slide 3. How does the consumer change his consumption bundle after the price of good X falls and price of good Y rises? 1point He increases the consumption of good He decreases the consumption of . X and decreases the consumption of . good X and increases the good Y. consumption of good Y. He makes no adjustments to the . None of the above. . consumption bundle after the price change. Individual and Market Demand.pptx . O Search Sign in X Transitions Animations Slide Show Review View Add-ins Help Foxit Reader PDF Share Comments Application CDS . Let's use the indifference curve 30lot Budget line analysis to understand how price changes affect a consumer's utility. 15 10 A B UJ New Budget line . In this example, Ken has $300 to spend each month on DVDs and 20 30 60 DVDS CDS. How does a price change after a consumers utility ? . When the price of a DVD is $10 and that of a CD is $10, Ken maximizes his utility by buying bundle A. . If the price of DVD falls to $5, and that of CD rises to $20, is Ken better or worse off than before?\fIf we take an inferior good on the Xaxis and a normal good on the Y-axis, then the income consumption curve will be lpoint . Vertical. . Horizontal. . Upward sloping. . Backward bending. Refer to Example 4.1 in Slides 15 and 16. The average per-household expenditures by income group show that health care and entertainment are 1 point . Inferior goods at all income levels. . Normal goods at all income levels. Normal goods at lower income levels Inferior goods at lower income levels . and inferior goods at higher income . and normal goods at higher income levels. levels. Individual and Market Demand.pptx - O Search Sign in Animations Slide Show Review View Add-ins Help Foxit Reader PDF Share EXAMPLE 4.1 CONSUMER EXPENDITURES IN THE UNITED STATES $80,000 $70,000 $60,000 FIGURE 4.5 $50,000 ENGEL CURVES FOR U.S. Annual Income $40,000 CONSUMERS Average per-household $30,000 expenditures on rented dwellings, health care, and $20,000 entertainment are plotted as $10,000 functions of annual income. Health care and entertainment SO $500 $1000 $1500 $2000 $2500 $3000 $3500 $4000 $4500 $5000 are normal goods, as Annual Expenditure expenditures increase with - Entertainment - Rented Dwelling - Health Care income. Rental housing, however, is an inferior good for incomes above $30,000.For finding the substitution effect of a price change, we keep the price ratio constant and change the utility level. lpoint . True Individual and Market Demand.pptx Search Sign in Design Transitions Animations Slide Show Review View Add-ins Help Foxit Reader PDF Share Comment Income and Substitution Effects of a Price Change: Coke Normal Good . A decrease in the price of a normal good leads to an increase in its consumption. 1 . For a normal good, the 0 Q Q1 5 Q 2 Pizza Slices substitution and income effects work in the same direction. Income and Substitution Effects of a Price change get line: L, and consumption point is A. Dave is consuming Q, amount of pizza slices.If a consumer's income increases, the consumption of an inferior gOOd ipoint . decreases. . increases. . stays the same. . increases or decreases \"'"h "V 'HH' Which of the following statements holds true? . All inferior goods have a downward . All inferior goods have an upward sloping demand curve. sloping demand curve. Inferior goods can have upward . None of the above. sloping or downward sloping demand . curves depending on the relative strengths of the substitution and income effects