Chapter 1,Slide 1,Topics to be Discussed,Individual Demand Income and Substitution Effects Market Demand Consumer Surplus,Chapter 1,Slide 2,Topics to be Discussed,Network Externalities Empirical Estimation of Demand,Chapter 1,Slide 3,Individual Demand,Price Changes Using the figures developed in the previous chapter, the impact of a change in the price of food can be illustrated using indifference curves.,Chapter 1,Slide 4,Effect of a Price Change,Food (units per month),Clothing (units per month),Chapter 1,Slide 5,Price-Consumption Curve,Effect of a Price Change,Food (units per month),Clothing (units per month),4,5,6,U2,U3,A,B,D,U1,4,12,20,The price-consumption curve traces out the utility maximizing market basket for the various prices for food.,Chapter 1,Slide 6,Effect of a Price Change,Food (units per month),Price of Food,Chapter 1,Slide 7,Individual Demand,Two Important Properties of Demand Curves 1)The level of utility that can be attained changes as we move along the curve.,The Individual Demand Curve,Chapter 1,Slide 8,Individual Demand,Two Important Properties of Demand Curves 2)At every point on the demand curve, the consumer is maximizing utility by satisfying the condition that the MRS of food for clothing equals the ratio of the prices of food andclothing.,The Individual Demand Curve,Chapter 1,Slide 9,Effect of a Price Change,Food (units per month),Price of Food,Chapter 1,Slide 10,Individual Demand,Income Changes Using the figures developed in the previous chapter, the impact of a change in the income can be illustrated using indifference curves.,Chapter 1,Slide 11,Effects of Income Changes,Food (units per month),Clothing (units per month),An increase in income, with the prices fixed, causes consumers to alter their choice of market basket.,Assume: Pf = $1 Pc = $2 I = $10, $20, $30,Chapter 1,Slide 12,Effects of Income Changes,Food (units per month),Price of food,An increase in income, from $10 to $20 to $30, with the prices fixed, shifts the consumers demand curve to the right.,Chapter 1,Slide 13,Individual Demand,Income Changes The income-consumption curve traces out the utility-maximizing combinations of food and clothing associated with every income level.,Chapter 1,Slide 14,Individual Demand,Income Changes An increase in income shifts the budget line to the right, increasing consumption along the income-consumption curve. Simultaneously, the increase in income shifts the demand curve to the right.,Chapter 1,Slide 15,Individual Demand,Income Changes When the income-consumption curve has a positive slope: The quantity demanded increases with income. The income elasticity of demand is positive. The good is a normal good.,Normal Good vs. Inferior Good,Chapter 1,Slide 16,Individual Demand,Income Changes When the income-consumption curve has a negative slope: The quantity demanded decreases with income. The income elasticity of demand is negative. The good is an inferior good.,Normal Good vs. Inferior Good,Chapter 1,Slide 17,An Inferior Good,Hamburger (units per month),Steak (units per month),Chapter 1,Slide 18,Individual Demand,Engel Curves Engel curves relate the quantity of good consumed to income. If the good is a normal good, the Engel curve is upward sloping. If the good is an inferior good, the Engel curve is downward sloping.,Chapter 1,Slide 19,Engel Curves,Food (units per month),30,4,8,12,10,Income ($ per month),20,16,0,Chapter 1,Slide 20,Engel Curves,Food (units per month),30,4,8,12,10,Income ($ per month),20,16,0,Consumer Expendituresin the United States,Entertainment70094712741514205426544300 Owned Dwellings1116172522533243445457939898 Rented Dwellings1957217023712536213715401266 Health Care1031169719181820205222142642 Food2656338541094888542962208279 Clothing85997813631772177826143442,ExpenditureLess than1,000-20,000-30,000-40,000-50,000-70,000- ($) on:$10,00019,00029,00039,00049,00069,000and above,Income Group (1997 $),Chapter 1,Slide 22,Individual Demand,1) Two goods are considered substitutes if an increase (decrease) in the price of one leads to an increase (decrease) in the quantity demanded of the other. e.g. movie tickets and video rentals,Substitutes and Complements,Chapter 1,Slide 23,Individual Demand,2) Two goods are considered complements if an increase (decrease) in the price of one leads to a decrease (increase) in the quantity demanded of the other. e.g. gasoline and motor oil,Substitutes and Complements,Chapter 1,Slide 24,Individual Demand,3) Two goods are independent when a change in the price of one good has no effect on the quantity demandedof the other,Substitutes and Complements,Chapter 1,Slide 25,Individual Demand,Substitutes and Complements If the price consumption curve is downward-sloping, the two goods are considered substitutes. If the price consumption curve is upward-sloping, the two goods are considered complements. They could be both!,Chapter 1,Slide 26,Inco