Income and Substitution - Lecture 9 Flashcards
(21 cards)
how do we get an income consumption curve
when income increases we shift the budget constraint outwards
there would also be more indifference curves which also shift outwards
we connect the intercepts of each budget constraint and indifference curve
what does the income consumption curve show
how the change in income changes the consumption of both goods
how do we show a more income elastic income consumption curve
the curve would be flatter as the percentage change in quantity demanded will be larger than the percentage change in income
what is an Engel curve
using the income consumption curve from joining the indifference curves and the budget constraint we make another graph with only the income consumption curve
X axis- quantity demanded
Y- axis- income
what is the difference between income consumption curve and the Engel curve
income consumption curve shows how the change in income effect both goods
Engel curve shows how the change in income effects one of the goods
giffen good meaning
a good which people buy more when the price goes up
doesn’t follow laws of demand
its an example of an inferior good
what is the price consumption curve
change in price will cause a change in consumption
how do we get the price consumption curve
we have the budget constraint curve
the price of one good decreases
the price constraint curve becomes flatter
there are new indifference curves
we join the points where the indifference curves and budget constraint curves cross and we get the price consumption curve.
inferior good meaning
when income increases the demand of a good decreases
YED<0
normal good price consumption curve how to draw
increase in price of good X
budget constraint becomes steeper
increase in demand of good X on new budget constraint
connect the new points
draw the indifference curves at each point
how to show a larger ped (inelastic) on the price consumption curve
we plot the normal price consumption curve
plot a point to the right of the furthest point
the price consumption curve should be more steep
how do we show how consumption varies with price
we have the price consumption curve drawn
we make a new graph
X axis- quantity demanded of good X
Y axis- price of good X
we then plot a similar shape of the price consumption curve and the curve becomes demand.
This shows the demand for one person.
what is the law of demand
quantity demanded tends to fall as price increases
what is the income effect
people feel poorer:
they cannot buy as much with their fixed incomes as prices increase
what is the substitution effect
people change their consumption:
they buy similar bit rival products
or
they spend their money on other products
when prices rises
how to draw the substitution effect
draw the first budget constraint
draw the indifference curve for the original budget constraint
increase the price of good X
budget constraint becomes steeper
draw a parallel line to the new budget constraint (the “tool”)
move the tool to be a tangent of the original indifference curve
at the tangent that will show the decrease in the demand of good X
this is due to the change in relative price
how to draw the income effect
then where the tool crosses the original budget constraint curve that’s the demand of Y that will give the most utility on the new budget constraint curve.
then draw the new indifference curve.
this is due to the change in real income
what does the slope in the budget constraint represent
trade off
relative price
what shows real income in the budget constraint
the triangle made by the intercepts and the origin
how to draw a substitution effect for a giffen good
draw a budget constraint curve
increase price of good X (giffen good)
make a parallel line to the new budget constraint curve and place it at the tangent for the original indifference curve
that is how much the good is X will be demanded.
how to draw an income effect for a giffen good
find the quantity demanded for the substitution effect
plot the new quantity demanded of X further than the original demand of X
the difference between the quantity demanded at the substitution effect and the newest quantity demanded is the income effect
at that point also draw an indifference curve
