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© 2003 McGraw-Hill Ryerson Limited
Describing
Describing
Consumer
Consumer
Preferences Using
Preferences Using
Indierence Curves
Indierence Curves
Chapter 8 Appendix
Chapter 8 Appendix
© 2003 McGraw-Hill Ryerson Limited.
Income expansion path
Income expansion path
◆
Income expansion path -IEP- traces all
the best (utility-maximizing) choices a
consumer makes as income changes.
●
●
© 2003 McGraw-Hill Ryerson Limited.
Income expansion path,
Income expansion path,
Fig. A8-1 a and b, p 195
Fig. A8-1 a and b, p 195
!
© 2003 McGraw-Hill Ryerson Limited.
"
Engel Curves
Engel Curves
◆
An Engel curve plots all the best
choices a consumer makes against
INCOME.
●
#$%##&#
◆
If an Engel curve is upward sloping, a
good is normal; downward sloping
indicates an inferior good.
© 2003 McGraw-Hill Ryerson Limited.
'
Engel Curves,
Engel Curves,
Fig. A8-2, p 195
Fig. A8-2, p 195
(##&
$
$#$
)*&
$#$
)$#&
© 2003 McGraw-Hill Ryerson Limited.
+
Price Expansion Path
Price Expansion Path
◆
Price expansion path – PEP – traces all
the best choices of a consumer as the
relative price changes.
© 2003 McGraw-Hill Ryerson Limited.
,
Price Expansion Path,
Price Expansion Path,
Fig. A8-3, p 195
Fig. A8-3, p 195
)*
&
)*
© 2003 McGraw-Hill Ryerson Limited.
Income and
Income and
substitution eects
substitution eects
◆
The law of demand states that there is
an inverse relationship between price
and quantity demanded. Two effects
occur:
●
$/$#
●
01###/$#
© 2003 McGraw-Hill Ryerson Limited.
2
Income and
Income and
substitution eects
substitution eects
◆
Income effect reflects the purchasing
power change as a result of the change in
price.
●
3#$$$/#
1&4$$
●
3#$$$/#
1&4$$5
© 2003 McGraw-Hill Ryerson Limited.
6
Income and
Income and
substitution eects
substitution eects
◆
Substitution effect reflects our
willingness to switch consumption away
from goods that become relatively more
expensive.
●
#7$81&
#9
●
###81&#
#7&*7$#5
[...]... Deriving the Demand Curveoffor Good X, Figure A8Price 5b, p 197 Good X P1 b)Demand curve A B P2 C P3 Demand X X X 1 2 3 Quantity of Good X © 2003 McGraw-Hill Ryerson Limited Describing Consumer Preferences Using Indifference Curves End of Chapter 8 Appendix © 2003 McGraw-Hill Ryerson Limited . McGraw-Hill Ryerson Limited
Describing
Describing
Consumer
Consumer
Preferences Using
Preferences Using
Indierence Curves
Indierence Curves
Chapter 8 Appendix
Chapter. McGraw-Hill Ryerson Limited
Describing
Describing
Consumer
Consumer
Preferences Using
Preferences Using
Indierence Curves
Indierence Curves
End of Chapter
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