ECON 1101 1nd Edition Lecture 22 Outline of Last Lecture I. Consumer theory and demand curveII. Optimal Consumption Bundle and demand curveIII. Impact on demand from change in pricea. Substitution effectb. Income effectOutline of Current Lecture II. Income ChangeIII. What happens to optimal consumption bundle if the price changes?a. Income effectb. Substitution effectCurrent LectureIncome ChangePrice stays the same in income increases.EX: $24 $40 income$4 = priceRecall inferior good = income goes up, you buy lessnormal good = income goes up, you buy moreWith income change, the budget constraint (bc) line is a parallel shift to the right when income increases and the good is a normal good. (Shift to the left with the income decreases)The slope of bc is the opportunity cost (buy 1 more of X, how many Y do you give up?)Changes:optimal consumption bundleamount boughtbudget constraint lineThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Doesn’t change:opportunity costcost of productsHappier (more utility) when more northeast on the graphInferior Good?Its impossible to have two inferior goods. You can have two normal goods or one normal one inferior. Compare OCBconsume more after income change (increase)? Normal goodConsumer less after income change (increase)? Inferior GoodWhat Happens to Optimal Consumption Bundle if the Price Changes?When price changes:1) OCB goes down (BC slope changes)2) Getting more income?EX: income = $24 P(juice)=$2 P(curds)=$4Change = P(curds)= $1If we stick with the same BC then we would have $9 extra. (3 @ $3 = $9)We can buy more of items DEPENDING ON PREFERENCE.Income EffectChange in income holding opportunity cost at fixed new levelSpam = $5 Income = $30(Buy 6 cans)Spam = $10Income = $30(Buy 3 cans)Spending power changes when price changes Substitution EffectEffect on change in opportunity cost?Same indifference cure as before. Income = $30 millions of different goods to choose from spending power is negligible. Opportunity cost for spam changes because other goods are there for substitutes. Putting them togetherTotal effect= final OCBRemember: opportunity cost changespurchasing power (or income) changesTake new slope + shift it back to the original indifference curveAS is susbstitution effectSC is income effectAC is total effectSubsitution effectNew opportunity cost on the same indifference curveRecall that optimal consumption bundle (OCB)_is point where:1) On budget constraint line2) Marginal rate of consumption (P(curds)/P(juice))Price of good changes both 1 and 2 are messed up, therefore you need a new
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