The Individual Demand Schedule

The Individual Demand Curve Price – Consumption Curve: Curve PPC traces the utility-maximizing combinations of two goods, say clothing and food associated with every possible price of good (Fig.4.1 a) As price of food falls, the consumption of clothing may increase or decrease The consumption of both food and clothing can increase because the

• An Individual Demand Curve relates the quantity of a good that a single consumer will buy to the price of that good. In Fig. 4.1(b), the IDC relates the quantity of food that the consumer will buy to the price of food. This Curve has two important opportunities: • the level of utility that can be attained changes as we move along the curve • 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 prices of food and clothing • Income – Consumption Curve traces out the utility-maximizing combinations of food and clothing associated with every income level. The curve slopes upwards because the consumption of both food and clothing increases as income increases (Fig. 4.2 a)

• Normal goods are those goods in which the demand for them increases as income increases (income elasticity of demand is positive) • Inferior goods are those goods in which the demand for them is less as income increases (income elasticity of demand is negative)

Engel Curves • Engel Curves relate the quantity of a good consumed to income. In Fig. 4.4 (a), food is a normal good and the Engel Curve is upward sloping. In (b), hamburger is a normal good for income less than $20 per month and an inferior good for income greater than $20 per month Giffen Good • The decline in the price of food frees enough income so that the consumer desires to buy more clothing and fewer

Market Demand Schedule/Curve: sum of all individual demand curves of all consumers in a particular market. • Two points of a demand curve: • the market demand curve will shift to the right as more consumers enter the market • factors that influence the demands of many consumers will also affect market demand • Relevance of individual and market demand curves

Market Demand Schedule/Curve: sum of all individual demand curves of all consumers in a particular market. • Two points of a demand curve: • the market demand curve will shift to the right as more consumers enter the market • factors that influence the demands of many consumers will also affect market demand • Relevance of individual and market demand curves

Income and Substitution Effects

• Income effect: If one of the goods becomes cheaper, consumers enjoy an increase in real purchasing power. They are better off because they can buy the same amount of the good for less money, and thus have money left over for additional purchase. The change in demand resulting from this change in real purchasing power is called the income effect • Substitution effect: consumers will tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive. This response to a change in the relative prices of goods is called the substitution effect

• Mathematical Expression of Demand Function • Mathematical Expression of Supply Function