Principles of Microeconomics Lecture 5 – Demand
If the price of one of the goods in the bundle were to increase the budget constraints slope would change.
Rotating around the point of the good whose price is unchanged
A change in the budget constraint would result in the consumer moving to a new indifference curve,
resulting in a new budget (depending on whether price has increased or decreased will effect whether we
move up or down an indifference curve)
The price offer curve is the curve taken through all the optimal bundles points as the price of ONE of the
goods in the bundle changes and new indifference reached
Best to go through the slide to gain a better understanding
In the case of perfect compliments the consumer wants to the consume one unit of good x, with one unit of
good y
For perfect complements the ordinary demand function for commodities 1 and 2 are:
y
o X1* (p1,p2,y) = X2* (p1,p2,y) =
p 1+ p2
With p2 and y fixed higher p1 causes smaller x1 and x2
Inverse demand
o Instead of expressing quantity as function of own price, you can express own price as a function of
quantity
A perfect-complements example:
o
o is the ordinary demand function and
o
o Is the inverse demand function
The collection of all bundles as the income changes (hence the budget constraint shifts out parallel to itself)
is called the income offer curve
A normal good has an positively sloped Engel curve because, quantity demanded rises with income
Conversely an inferior good has a negatively sloped Engel curve
A good is called an ordinary if the quantity demanded of it always increases as its own price decreases
If, for some values of its own price, the quantity demanded of a good rises as its own-price increases then
the good is called Giffen.
If an increase in p2
o increases demand for commodity 1 then commodity 1 is a gross substitute for commodity 2.
o Reduces demand for commodity 1 then commodity 1 is a gross complement for commodity 2.
If the price of one of the goods in the bundle were to increase the budget constraints slope would change.
Rotating around the point of the good whose price is unchanged
A change in the budget constraint would result in the consumer moving to a new indifference curve,
resulting in a new budget (depending on whether price has increased or decreased will effect whether we
move up or down an indifference curve)
The price offer curve is the curve taken through all the optimal bundles points as the price of ONE of the
goods in the bundle changes and new indifference reached
Best to go through the slide to gain a better understanding
In the case of perfect compliments the consumer wants to the consume one unit of good x, with one unit of
good y
For perfect complements the ordinary demand function for commodities 1 and 2 are:
y
o X1* (p1,p2,y) = X2* (p1,p2,y) =
p 1+ p2
With p2 and y fixed higher p1 causes smaller x1 and x2
Inverse demand
o Instead of expressing quantity as function of own price, you can express own price as a function of
quantity
A perfect-complements example:
o
o is the ordinary demand function and
o
o Is the inverse demand function
The collection of all bundles as the income changes (hence the budget constraint shifts out parallel to itself)
is called the income offer curve
A normal good has an positively sloped Engel curve because, quantity demanded rises with income
Conversely an inferior good has a negatively sloped Engel curve
A good is called an ordinary if the quantity demanded of it always increases as its own price decreases
If, for some values of its own price, the quantity demanded of a good rises as its own-price increases then
the good is called Giffen.
If an increase in p2
o increases demand for commodity 1 then commodity 1 is a gross substitute for commodity 2.
o Reduces demand for commodity 1 then commodity 1 is a gross complement for commodity 2.
