ch6 Part1

Chapter6 Demand (PartI)
Intermediate Microeconomics: A Modern Approach
Hal Varian
Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Learning Objectives
By the end of this chapter, students should understand:

Price offer curve, ordinary demand function, reverse demand
function.
Giffen good, ordinary good.

Demand Functions
Demand Functions
The consumers demand functions give the optimal amounts
of each of the goods as a function of the prices and income
faced by the consumer.
We write the demand functions as
x1 = x1 (p1 , p2 , m)
x2 = x2 (p1 , p2 , m)
Demand function is also called ordinary demand function.

Demand Functions and Comparative Statics Analysis
Comparative Statics Analysis

Comparative statics analysis of ordinary demand functions
is defined as:
The study of how ordinary demands x1∗ = x1∗ (p1 , p2 , m) and
x2∗ = x2∗ (p1 , p2 , m) change as prices p1, p2 and income m
change.
We can also denote income by y.

The First Question: Own-Price Changes
Own-Price Changes
How does x1∗ = x1∗ (p1 , p2 , y ) change as p1 changes, holding
p2 and y constant?
0 00 000
Consider 3 price levels: p1 , p1 , p1 .
0 00 000
p1 < p1 < p1

Own-Price Changes
0
Budget constraint with price of good 1 equal to p1 :

Own-Price Changes
0 00
Price of good 1 increases from p1 to p1 :

Own-Price Changes
00 000
Price of good 1 increases from p1 to p1 :

Own-Price Changes
Preference of the consumer:

Own-Price Changes
0
The consumer decides the optimal choice when p1 is p1 :

Own-Price Changes
0
The consumer decides the optimal choice when p1 is p1 :

Own-Price Changes

Own-Price Changes

Own-Price Changes

Own-Price Changes

Own-Price Changes

Own-Price Changes

Own-Price Changes

Price Offer Curve
Price Offer Curve

The curve containing all the optimal points traced out as p1
changes, with p2 and y constant, is the p1- price offer curve.
This curve represents the bundles that would be demanded at
different prices for good 1.

Demand Curve
Demand Curve
Hold the price of good 2 and money income fixed, and for
each different value of p1 plot the optimal level of
consumption of good 1. The result is the demand curve, or
ordinary demand curve.
The corresponding demand function is x1∗ = x1∗ (p1 )

Demand Curve
Demand Curve Answers the Following Question:

Demand Curve x1∗ = x1∗ (p1 ) Answers the Following Question:
Given the price for commodity 1 what is the quantity
demanded of commodity 1?
It depicts the behavior of the consumer to price changes in
the market.

(Ordinary) Demand Curve

(Ordinary) Demand Curve

Inverse Demand Curve
Inverse Demand Curve Answers the Following Question:

Inverse Demand Curve Answers the Following Question:
0
If you know x1 units are demanded, what is the price of
commodity 1?
It put p1 on the x-axis, x1∗ on the x-axis.



Examples of Inverse Demand Curve
We can use both ways to depict the same demand curve:

Examples of Inverse Demand Curve
We can use both ways to depict the same demand curve:

Examples
Examples
Then Lets look at a few examples of demand curves using the
following preferences:
1. Cobb-Douglas preferences
2. Perfect Complements.
3. Perfect Substitutes





Summary for Cobb-Douglas preferences

P1 price offer curve is a horizontal straight line, of the
following form:
by
x2∗ =
(a + b)p2
with the right-hand side a constant.
Demand curve for good 1 slopes downwards, of the following
form:
ay
x1∗ =
(a + b)p1
is a function of p1 .
Remember: y and p2 are fixed, a and b are given parameters.

2. Perfect Complements






Summary for Perfect Complements

P1 price offer curve is a straight line going through the origin,
of the following form:
x2∗ = x1∗
Demand curve for good 1 slopes downwards, of the following
form:
y
x1∗ =
(p1 + p2 )
is a function of p1 .
Remember: y and p2 are fixed.



p1<p2

p1=p2

p1=p2

p1>p2


Summary for Perfect Substitutes: Price Offer Curve

P1 price offer curve has 3 parts:
y
if p1 > p2 , it’s a point (0, )
p2
if p1 = p2 , it’s a straight line (x1 + x2 )p2 = y , with the two
y y
end points (0, ) and ( , 0)
p2 p2
y
if p1 < p2 , it’s part of the x-axis x1 >
p2

Summary for Perfect Substitutes: Demand Curve

Demand curve for good 1 looks like ’slopes downwards’, it has
3 parts as well:
if p1 > p2 , it’s part of the y-axis p1 > p2
if p1 = p2 , it’s a straight line p1 = p2 , with the two end points
y
(0, p2 ) and ( , p2 )
p2
y
if p1 < p2 , it slopes downwards x1∗ = , ie, x1∗ is a function of
p1
p1 .

Ordinary Goods vs. Giffen Goods
Ordinary Goods vs. Giffen Goods

How does the quantity demanded of good 1 respond to
changes of p1?
Intuition tells us that the quantity demanded of good 1 should
increase when its price decreases. Indeed this is the ordinary
good case.
In some cases, a decrease in the price of good 1 leads to a
reduction in the demand for good 1. Such a good is called a
Giffen good.

Ordinary Goods

Ordinary Goods

Giffen Goods

Giffen Goods

Examples of Giffen Goods
One Interesting Question

Do All Demand Curves Slope Downward?

Normally, when the price of a good rises, people buy less of it.
This usual behavior, called the law of demand, is reflected in
the downward slope of the demand curve.

However, demand curves can sometimes slope upward as in
the Giffen good case.

Examples of Giffen Goods
Giffen Goods
Giffen Good is usually a strongly inferior good.
You typically don’t want it if you are in a better condition.
Example : Potato
Suppose you eat 29 potatoes and 1 meat each month. The
price of meat is much higher than potatoes.
Suppose one day the price of potatoes rises, so the money left
over after you buy 29 potatoes is much smaller.
With this you can’t afford to buy 1 meat, the only choice is to
give up meat and turn to eat potatoes...
Then we observe you buy more of potatoes as the price of it
increases...

The End

ch6 Part1

Uploaded by

Copyright:

Available Formats

ch6 Part1

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ch6 Part1

Uploaded by

Copyright:

Available Formats

Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

By the end of this chapter, students should understand:

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Comparative Statics Analysis

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Price Offer Curve

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Demand Curve Answers the Following Question:

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Inverse Demand Curve Answers the Following Question:

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Summary for Cobb-Douglas preferences

Remember: y and p2 are fixed, a and b are given parameters.

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Summary for Perfect Complements

Remember: y and p2 are fixed.

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)

Intermediate Microeconomics: A Modern Approach Chapter6 Demand (PartI)