Demand Functions & Comparative Statics Flashcards
(14 cards)
What is a demand function in microeconomics?
A mathematical expression showing how much of a good a consumer will purchase as a function of prices and income:
X=X(PX,PY,M)
Y=Y(PX,PY,M)
What is Marshallian demand?
The quantity of a good that a utility-maximising consumer will choose at given prices and income — derived from the standard consumer optimisation problem.
What is an Engel curve?
A graph showing the relationship between income and quantity demanded of a good, holding prices constant.
How does income affect demand for normal vs inferior goods?
Normal goods: Demand increases with income (positive slope Engel curve).
Inferior goods: Demand decreases with income (negative slope Engel curve).
What are homothetic preferences?
Preferences where the Engel curve is a straight line through the origin — i.e. demand scales proportionally with income. Cobb-Douglas utility functions are an example.
What are the demand functions under Cobb-Douglas utility U(X,Y)=X^αY^β?
look at formula sheet
What happens under linear utility U(X,Y)=aX+bY?
The consumer will consume only the good with the higher utility per unit of cost — leading to corner solutions. No interior solution.
What characterises quasilinear utility functions?
Utility of the form U(X,Y)=f(X)+Y or U(X,Y)=alnX+Y.
The demand for one good (X) is independent of income; income changes affect only demand for the other good (Y).
How do Engel curves behave under quasilinear preferences?
The Engel curve for X is flat (horizontal); all income variation is allocated to Y once the minimum X is met.
What is the difference between a demand curve and a demand function?
Demand curve: Plots quantity demanded as price of one good varies (holding other variables fixed).
Demand function: Expresses demand as a function of all relevant variables (prices and income).
How do we obtain demand curves empirically?
Either:
Estimate consumer preferences directly (expensive, often inaccurate)
Observe real-world choices and infer preferences using statistical methods, e.g., from ONS household data.
Why might observed changes in quantity not reflect a true demand curve shift?
Because other factors (income, preferences, other prices) may also change — we may be observing a shift between demand curves, not along one.
What are the axes on a demand curve vs Engel curve?
Demand curve: Price (Y-axis), Quantity (X-axis)
Engel curve: Income (Y-axis), Quantity (X-axis)
What can demand and Engel curves be used for in policy or business?
Forecasting consumer response to price/income changes, identifying elasticities, informing taxation or subsidy policies.
