Ec4004 Lecture 2 Individual Demand

EC4004 Lecture 3Individual Demand

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Utility Functions

Indifference Curves

Budget Constraints

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Demand Functions

Income & Substitution Effects

Consumer Surplus

1.

Demand Functions

Demand Functions

elements determine quantity demanded

3

Prices of X and Y

1

Income (I)

2

Person’s preferences for X and Y

3

What happens when Income Increases?

Mathematica

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2.

Substitution

Part of the change in the quantity demanded for other goods is caused by the substitution of one good for another: called substitution effect

Income Effects

Part of the change in the quantity demanded is caused by the change

in real income: called income effect.

Mathematica

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3.

Quantity of Yper week

U1U2

Quantity of Xper week

Budget constraint for P’X

Budget constraint for P’’X

X’ X” X’”

(a) Individual’s indifference curve map

0

Price

Quantity of X per weekX’ X” (b) Demand curve0

P’X

P’’X

Constructing Individual Demand Curves

Quantity of Yper week

U1U2

U3

X

Quantity of Xper week

X’ X” X’”

(a) Individual’s indifference curve map

0

Price

P9

XP0

XP-

Quantity of X per weekX’ X” X’” (b) Demand curve0

Budget constraint for P’X

Budget constraint for P’’X

Budget constraint for P’’’X

Quantity of Yper week

U1U2

U3

X

Quantity of Xper week

X’ X” X’”

(a) Individual’s indifference curve map

0

Price

P9

XP0

XP- dX

Quantity of Xper week

X’ X” X’”(b) Demand curve

0

Budget constraint for P’X

Budget constraint for P’’X

Budget constraint for P’’’X

4.

Price (PT= €/shirt)

15

Quantity (shirts)

Consumer Surplus from T-Shirt Demand Price (€/shirt)

11

9

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Next Time• Try exercises 3.4, 3.5, 3.1

33

Summary

Demand Functions

Income & Substitution Effects

Consumer Surplus

EC4004 Lecture 3Individual Demand