Kinh tế học vĩ mô - Chapter 8: Describing consumer preferences using indifference curves

Describing Consumer Preferences Using Indifference CurvesChapter 8 AppendixIncome expansion pathIncome expansion path -IEP- traces all the best (utility-maximizing) choices a consumer makes as income changes.The IEP slopes up if a good is a normal goodThe IEP is downward sloping if a good is inferiorIncome expansion path, Fig. A8-1 a and b, p 195U1U2U3U3U2U1IEPIEPGood YGood YGood XGood Xa) Normal gooda) Inferior goodEngel CurvesAn Engel curve plots all the best choices a consumer makes against INCOME.It is an income-quantity relationshipIf an Engel curve is upward sloping, a good is normal; downward sloping indicates an inferior good.Engel Curves, Fig. A8-2, p 195QuantitydemandedIncomeX1X2X3Income elastic normal good (luxury)Income inelasticnormal good (necessity)Inferior goodPrice Expansion PathPrice expansion path – PEP – traces all the best choices of a consumer as the relative price changes.Price Expansion Path, Fig. A8-3, p 195Good YGood XB/(Px)1B/PyB/(Px)2PEPU1U2Income and substitution effectsThe law of demand states that there is an inverse relationship between price and quantity demanded. Two effects occur:Income effectSubstitution effectIncome and substitution effectsIncome effect reflects the purchasing power change as a result of the change in price.With a price decrease we can afford to buy more – a purchasing power increaseWith a price increase we can afford to buy less – a purchasing power decrease.Income and substitution effectsSubstitution effect reflects our willingness to switch consumption away from goods that become relatively more expensive.If relative price of a good falls, we buy more of it;At the same time, we buy less of the relatively more expensive product.Income and substitution effectsFor normal goods, income and substitution effects work in the same directionFor inferior goods, income and substitution effects work in the opposite direction.Income and substitution effects, Fig. 8-4a, p 196FB/PyU1U2EGB/(Px)1B/(Px ) 2Good YGood Xa)Normal good XSubstitutioneffectIncomeeffectIncome and substitution effects, Fig. 8-4b, p 196U1U2EFGB/(Px)1B/PyB/(Px)2Good YGood Xb)Inferior good XSubstitutioneffectIncomeeffectDeriving the Demand Curve for Good X, Figure A8-5a, p 197Good YGood XPEPABCX1X2X3a)Price-expansionpathB/P1B/P2B/P3Deriving the Demand Curve for Good X, Figure A8-5b, p 197Price ofGood XQuantity of Good XABCX1X2X3DemandP1P2P3b)Demand curveDescribing Consumer Preferences Using Indifference CurvesEnd of Chapter 8 Appendix