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Chapter4IndividualandMarketDemandTopicstobeDiscussedIndividualDemandIncomeandSubstitutionEffectsMarketDemandConsumerSurplusIndividualDemandPriceChanges◦Usingthefiguresdevelopedinthepreviouschapter,theimpactofachangeinthepriceoffoodcanbeillustratedusingindifferencecurves◦Foreachpricechange,wecandeterminehowmuchofthegoodtheindividualwouldpurchasegiventheirbudgetlinesandindifferencecurvesEffectofaPriceChangeEachpriceleadstodifferentamountsoffoodpurchased5U3D4U2B1220Assume:•I=$20•PC=$2•PF=$2,$1,$0.50Food(unitspermonth)Clothing6AU1410EffectofaPriceChangeThePrice-ConsumptionCurvetracesouttheutilitymaximizingmarketbasketforeachpriceoffood4U2B12205U3DFood(unitspermonth)Clothing6AU1410EffectofaPriceChangeBychangingpricesandshowingwhattheconsumerwillpurchase,wecancreateademandscheduleanddemandcurvefortheindividualFromthepreviousexample:DemandSchedulePQ$2.004$1.0012$0.5020EffectofaPriceChangeDemandCurveIndividualDemandrelatesthequantityofagoodthataconsumerwillbuytothepriceofthatgood.Food(unitspermonth)PriceofFoodHEG$2.0041220$1.00$.50DemandCurves–ImportantPropertiesThelevelofutilitythatcanbeattainedchangesaswemovealongthecurveAteverypointonthedemandcurve,theconsumerismaximizingutilitybysatisfyingtheconditionthattheMRSoffoodforclothingequalstheratioofthepricesoffoodandclothingEffectofaPriceChangeFood(unitspermonth)PriceofFoodHEG$2.0041220$1.00$.50DemandCurve•E:Pf/Pc=2/2=1=MRS•G:Pf/Pc=1/2=.5=MRS•H:Pf/Pc=.5/2=.25=MRSWhenthepricefalls,Pf/Pc&MRSalsofallIndividualDemandIncomeChanges◦Usingthefiguresdevelopedinthepreviouschapter,theimpactofachangeintheincomecanbeillustratedusingindifferencecurves◦Changingincome,withpricesfixed,causesconsumerstochangetheirmarketbasketsEffectsofIncomeChangesFood(unitspermonth)Clothing(unitspermonth)Anincreaseinincome,withthepricesfixed,causesconsumerstoaltertheirchoiceofmarketbasket.34AU1510BU2D716U3Assume:Pf=$1,Pc=$2I=$10,$20,$30IndividualDemandIncomeChanges◦Theincome-consumptioncurvetracesouttheutility-maximizingco...