Date post: | 06-Jul-2018 |
Category: |
Documents |
Upload: | tumi-mothusi |
View: | 231 times |
Download: | 0 times |
of 24
8/17/2019 Unit 1.3 2016 students.pdf
1/24
8/17/2019 Unit 1.3 2016 students.pdf
2/24
Outcomes
• Explain and illustrate: – the price-consumption curve – the effect of a change in price and a change in
income on the consumer’s equilibrium for both anormal and inferior product
– the income-consumption curve – How the income and substitution effect can be used
to explain consumers reaction on price sensitive andnon-price sensitive products.
– Engel –curves for different products
8/17/2019 Unit 1.3 2016 students.pdf
3/24
The Effect of Changes in Price
• Price-consumption curve (PCC): for a
good X is the set of optimal bundles tracedon an indifference map as the price of Xvaries (holding income and the price of Y
constant).
• Purpose: used to derive demand curve
3
8/17/2019 Unit 1.3 2016 students.pdf
4/24
Figure 4.1: The Price-Consumption
Curve
4
8/17/2019 Unit 1.3 2016 students.pdf
5/24
Figure 4.2: An Individual Consumer’s
Demand Curve
5
8/17/2019 Unit 1.3 2016 students.pdf
6/24
The Effects of Changes in Income
• Income-consumption curve (ICC): for a
good X is the set of optimal bundles tracedon an indifference map as income varies(holding the prices of X and Y constant).
• Engel curve : curve that plots therelationship between the optimal quantity of
X consumed and income.- Normal product : one whose quantity demanded rises as
income rises.
- Inferior product : one whose quantity demanded falls asincome rises 6
8/17/2019 Unit 1.3 2016 students.pdf
7/24
The Effects of Changes in
Income• Normal good : one whose quantity
demanded rises as income rises.
• Inferior good : one whose quantitydemanded falls as income rises.
7
8/17/2019 Unit 1.3 2016 students.pdf
8/24
Figure 4.3: An Income-Consumption
Curve
8
8/17/2019 Unit 1.3 2016 students.pdf
9/24
Figure 4.4: An Individual Consumer’s
Engel Curve
9
8/17/2019 Unit 1.3 2016 students.pdf
10/24
Figure 4.31: Engel Curves for Different
Types of Goods
10
Average Income (R/wk) Average Income (R/wk)
0 0
8/17/2019 Unit 1.3 2016 students.pdf
11/24
Engel curves• Difference between products:
– Normal products
– Luxury products – positive slope + elastic(flatter)
– Necessities – positive slope + inelatic
(steeper)
– Inferior products – negative slope
8/17/2019 Unit 1.3 2016 students.pdf
12/24
8/17/2019 Unit 1.3 2016 students.pdf
13/24
Figure 4.6: The Total Effect
of a Price Increase
13
8/17/2019 Unit 1.3 2016 students.pdf
14/24
Figure 4.7: The Substitution and Income Effects
of a Price Change for a Normal Good
14
8/17/2019 Unit 1.3 2016 students.pdf
15/24
Figure 4.8: Income and Substitution
Effects for an Inferior Good
15
8/17/2019 Unit 1.3 2016 students.pdf
16/24
8/17/2019 Unit 1.3 2016 students.pdf
17/24
Figure 4.12: Income and Substitution
Effects of a Price Increase for Salt
Y (R/mo)
Salt (kg/mo)
Salt (kg/mo)
Y (R/mo)
1 500 3 000
0.5 0.5002 0.5001
17
8/17/2019 Unit 1.3 2016 students.pdf
18/24
8/17/2019 Unit 1.3 2016 students.pdf
19/24
8/17/2019 Unit 1.3 2016 students.pdf
20/24
8/17/2019 Unit 1.3 2016 students.pdf
21/24
8/17/2019 Unit 1.3 2016 students.pdf
22/24
8/17/2019 Unit 1.3 2016 students.pdf
23/24
Figure 4.31: Engel Curves for Different
Types of Goods
23
Average Income (R/wk) Average Income (R/wk)
0 0
8/17/2019 Unit 1.3 2016 students.pdf
24/24
Engel curves• Difference between products:
– Normal products
– Luxury products – positive slope + elastic(flatter)
– Necessities – positive slope + inelatic
(steeper)
– Inferior products – negative slope