Lecture 4. Comparative Statics of Demand 范里安版《中级微观经济学》ppt.ppt

* Examples of Own-Price ChangesPerfect Complements Fixed p2 and y x1’’ x1’’’ p1’’ x1’’ p1’’’ p1’ Ordinary demand curve for good 1 p1 price offer curve * y/p1’ x1* p1 x1 x2 Utility Function The ordinary demand functions for good 1 and good 2 are Examples of Own-Price ChangesPerfect Substitutes * Examples of Own-Price ChangesPerfect Substitutes Fixed p2 and y x1’’ x1’’’ p1’’ x1’’ p1’’’ p1’ Ordinary demand curve for good 1 p1 price offer curve * x1* x2 x1 p1 Ordinary Goods p1 price offer curve A good is called ordinary if the quantity demanded of this good always increases as its own price decreases. An ordinary good has a downward-sloping demand curve * x2 x1 Giffen Goods p1 price offer curve A good is called Giffen good if for some prices of its own, the quantity demanded of this good rises as its own-price increases * x2 x1 Giffen Goods p1 price offer curve x1* An ordinary good has a demand curve with a positively sloped part Good 1 isGiffen p1 * x2 x1 What happens when a commodity’s price decreases? Substitution effect （替代效应）: the commodity is relatively cheaper, so consumers substitute it for now relatively more expensive other commodities. Income effect （收入效应）: the consumer’s budget of $y can purchase more than before, as if the consumer’s income rose, with consequent income effects on quantities demanded. Effects of a Price Change * Effects of a Price Change Lower price for commodity 1 pivots the constraint outwards. Consumer’s budget is $y. Now only $y’ are needed to buy the original bundle at the new prices,  as if the consumer’s income  has increased by $y - $y’. Original choice y/p2 y’/p2 y/p1 y/p1’ y’/p1’ * x2 x1 Changes to quantities demanded due to this ‘extra’ income are the income effect of the price change. Slutsky discovered that:Changes to demand from a price change are always the sum of a pure substitution effect and an income effect. At a lower price, less income is needed to buy the original bundle, so