Topic 1Lecture 7 Px Deriving demand curves The total effect of the price change is to move the consumer’s choice from ‘a’ to ‘â’. a â b X Px a If we plot this into the lower diagram, what are we plotting? X Robin Naylor, Department of Economics, Warwick
Topic 1Lecture 7 Px The total effect of the price change is to move the consumer’s choice from ‘a’ to ‘â’. a â b X Px a If we plot this into the lower diagram, what are we plotting? â X Robin Naylor, Department of Economics, Warwick
Topic 1Lecture 7 Px The total effect of the price change is to move the consumer’s choice from ‘a’ to ‘â’. a â b X Px a If we plot this into the lower diagram, what are we plotting? â ? X Robin Naylor, Department of Economics, Warwick
Topic 1Lecture 7 Px The total effect of the price change is to move the consumer’s choice from ‘a’ to ‘â’. a â b X Px a If we plot this into the lower diagram, what are we plotting? What can you say about the slope of this curve? Must it be –ve? â CMIDC X Robin Naylor, Department of Economics, Warwick
Topic 1Lecture 7 Px The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. a â b S X Px a If we plot this into the lower diagram, what are we plotting? b S ? X Robin Naylor, Department of Economics, Warwick
Topic 1Lecture 7 Px The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. a â b S X Px a If we plot this into the lower diagram, what are we plotting? b S CUDC/CRIDC X Robin Naylor, Department of Economics, Warwick
Topic 1Lecture 7 Px The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. a â b S X Px a b Must this curve have a –ve slope? S CUDC/CRIDC X Robin Naylor, Department of Economics, Warwick
The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. Topic 1Lecture 7 Px The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. a â b S I X The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. Px a b S I CRIDC X Robin Naylor, Department of Economics, Warwick
The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. Topic 1Lecture 7 Px The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. a â b S I X The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. Px a b â CMIDC S I CRIDC X Robin Naylor, Department of Economics, Warwick
The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. Topic 1Lecture 7 Px The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. The difference between the CRIDC and the CMIDC is the Income Effect. In this diagram, X is a Normal Good. Therefore, the CMIDC is more elastic than the CRIDC a â b S I X The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. Px a b â CMIDC S I CRIDC X Robin Naylor, Department of Economics, Warwick
The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. Topic 1Lecture 7 Px The difference between the CRIDC and the CMIDC is the Income Effect. In this diagram, X is a Weakly Inferior Good. Therefore, the CMIDC is less elastic than the CRIDC â The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. a b S I X The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. Px a b â S I CRIDC CMIDC X Robin Naylor, Department of Economics, Warwick
The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. Topic 1Lecture 7 Px â The difference between the CRIDC and the CMIDC is the Income Effect. In this diagram, X is a Strongly Inferior Good. Therefore, the CMIDC is +vely sloped. The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. a b I S X The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. Px a â b CMIDC ? I S CRIDC X Robin Naylor, Department of Economics, Warwick
The Substitution Effect of the price change is to move the consumer’s choice from ‘a’ to ‘b’. Topic 1Lecture 7 Px â The difference between the CRIDC and the CMIDC is the Income Effect. In this diagram, X is a Strongly Inferior Good. Therefore, the CMIDC is +vely sloped. (Giffen Good) The Income Effect of the price change is to move the consumer’s choice from ‘b’ to ‘â’. a b I S X The Substitution Effect determines the CRIDC. The Substitution Effect combined with the Income Effect determines the CMIDC. Px a â b I CMIDC S CRIDC X Robin Naylor, Department of Economics, Warwick
Topic 1: Lecture 7 Keep working at B&B 4th Ed., pp. 151-171 (and don’t worry about issues (especially the mathematical material) which go beyond what you have seen in lecture notes or seminar exercise sheets) Robin Naylor, Department of Economics, Warwick
