Can Be Derived From Individuals? Indifference Maps And Budg Essay, Research Paper
I will split the answer to this
question into four distinct parts.
Firstly I will show how indifference curves and budget constraints can
be used to construct an individual?s demand curve for a product. Secondly, I will describe and explain the
characteristics of the demand curves for normal, inferior and Giffen
goods. Thirdly I will show how
individual?s demand curves can be combined to form a market demand curve for a
product. Finally I will discuss how a
market demand curve can be estimated. Indifference curves graphically
connect bundles of goods. The consumer
is indifferent about the goods on the indifference curve. Any of the goods on the indifference curve
present the consumer with the same amount of utility. We do not quantify this utility, but instead use representation
theorem to rank levels of utility.
Budget lines are autonomous of taste and preferences and show
combinations of goods that the consumer can afford to buy with a fixed
level of income. The two curves combine
and the point where the indifference curve is tangent to the budget line
depicts the optimal choice between the goods (point A below). At this point the consumer is maximising his
utility, whilst not over or under spending in relation to his budget. By using comparative statics and
ceteris paribus we can see what effect a change in price will have upon the
optimal choice, and thus upon demand.
So, if we hold constant the level of income and the price of good 2, as
well as assuming that tastes and preferences have not changed, then we can
clearly see the effect of a price rise.
By raising the price of good 1 we flatten the budget line. As we can see from the diagram below the
price rise has pivoted the budget line to the left. Consequently a new optimal choice point is shown. We can see graphically that the increase in
price has lessened the demand for good 1.
If we continue raising the price, and marking the optimal choice points,
we can create a price offer curve.
A price offer curve simply depicts the optimal choice points as the
price changes (see diagram below). By
using the information from the price offer curve we can create the demand
curve. The demand curve is the plot of the demand function. The demand function is in this case
x1(p1,p2,m), or demand is equal to the function of the price of good 1, the
price of good 2 and money income. By
looking at the price offer curve we can see the quantity demand of good 1 at
different prices. We know this is the
demand function because we keep price 2 and money income fixed. As we see from the diagram below the demand
curve is usually negative, or downward sloping. For ordinary goods as price increases demand
decreases. So the change in quantity
demanded divided by the change in price will always lead to a negative number. However not all goods are
ordinary. As you increase the price of
some goods their demand increases, or the change in quantity demand divided by
the change in price leads to a positive number. These goods are known as giffen goods. We see from indifference curve analysis that
the price decrease causes a decrease in demand for good 1 (assuming that money
income is fixed and price 2 is unchanged).
The change in quantity demanded can be split up into substitution and
income effects. In the case of the
Giffen good the income effect causes a large reduction in demand, which
outweighs the substitution effect that increases demand (see diagram below).
The income effect simply measures the change in demand due to the change in
purchasing power (change in real income due a price change). But why is the income effect so large for a
Giffen good? By reducing the price of
good 1 purchasing power is increased, whilst money income is kept
constant. In the case of the Giffen
good the consumer uses the extra purchasing power to decrease his consumption
of good 1 by increasing his consumption of good 2! The price change also changes purchasing power, which in turn
changes demand. By joining up the optimal choice
points on the indifference map we see a different price offer curve to that of
an ordinary good. By plotting the
prices of good 1 at these optimal choice points and the quantity demand of
these goods at these prices we again draw a demand curve. However the demand curve for a Giffen good
is upward sloping (as seen in the above diagram). Inferior goods are goods whose
demand will increase upon a decrease in income, and whose demand will decrease
upon a rise in income. By increasing
income and shifting the budget lines to the right, we see that the optimal
choice point show a decrease in consumption of good 1 (assuming ceteris
paribus). By mapping the optimal choice
points for different levels of income we create an income offer curve. We then extrapolate the information from an
income offer curve and plot an Engel Curve.
Engel curves simply measure the demand for goods as a function of
income. As we see below an increase in
income causes a decrease in consumption for inferior goods, thus the Engel
curve is negatively sloped. However for
normal goods an increase in income causes an increase in consumption, thus
creating a positively sloped Engel curve. We know that price changes affect
purchasing power. A prices decrease causes real income to increase, and as in a
Giffen good, causing an income effect. The income effect for a price decrease
in this case causes negative income effect or a fall in demand. However inferior goods also have positive
substitution effects. When the price
decreases the change in the relative price causes consumers to switch over to
good 1. If the substitution effect
outweighs the income effect then the good is inferior (a price decrease still
causes a rise in demand), but if the income effect outweighs the substitution
effect then the good is a Giffen good. If plot the demand curves from
the price offer curves we see that it is only the Giffen good that produces an
upward sloping demand curve (price function demand curves), whereas normal and
inferior goods produce downward slopping demand curves (price function demand
curves). An inferior good may have an
inelastic curve as it is less responsive to price movements as a result of the
opposing income and substitution effects. An individual?s demand curve for
a good depends on prices and his income, but a market demand curve depends on
the same prices and distributions of all individual?s income. However it is more convenient to see
aggregate demand as a demand curve based on the same prices as an individual?s
demand curve with the sum of all individual?s income. Geometrically we simply add up
all individuals? demand curves horizontally.
We have to be careful not to add up linear demand functions (for example
20 ? p + 10 ?2p) as they are not technically linear demand functions. This concept is explained graphically below. In short it is very difficult to
estimate demand functions, but there are ways that it can be attempted. A simple way would be to interview
consumers. However how do we know that
consumers are honest? Will they make
snap judgements? To avoid these
artificial market situations could be created in consumer clinics. A group of people are given money to spend
on a set of goods. The moderator could
then change the price and view the effect on demand. This kind of strategy can be revealing, but does not supply the
necessary quantitative information required for a more precise estimation of
the demand function. A more expensive
and complex approach is known as the direct market approach. If a company waned to know the effect of
advertising upon the demand for a product they could change the level of
advertising in three different areas and examine the consequent changes in
demand. However this approach does not
counter the problem of other variables affecting demand. It is also costly and time consuming. However it could be used to cross check a
more statistical approach. The standard statistical approach
utilises historical data and attempts to extrapolate demand functions. In its
most simplistic form it is possible to extrapolate a demand function using such
methods as squared deviation and maximum likelihood. However making assumptions about the effect on the demand
function resulting from a change in one variable can be disastrous. There are many variables that affect demand;
so thinking that the change in demand is related only to the change in
advertising is overly simplistic. To
see the demand changes caused by a change in one variable is difficult,
especially if the demand function includes a simultaneous function. For example, the demand function of a good
may include income, education and advertising.
However income and education may be linked, thus there are at least two
relationships in this function. Unless
it is possible to separate these relationships then statistical analysis is
impossible. However if we know that on
variable affects one equation and not the other we can isolate the equations by
using data from the unique variable and watching demand rise or fall, thus
attributing the change to only one of the relationships. Even with this isolation of variables it is
still extremely difficult to estimate demand.
I must therefore conclude that it is almost impossible to estimate
demand accurately, but that is partly due to the inherent hypothetical nature
of the demand function. As economists
we must accept these difficulties and find ways to work around them.
Другие работы по теме:
Demand Curve Essay Research Paper Demand is
Demand Curve Essay, Research Paper Demand is “the quantity of a commodity that will be required at any given price over some given period of time”. “For the majority of the goods and services, experience shows that the quantity demanded will increase as the price falls.” (Stanlake 155) This characteristic can be shown by a demand curve.
Private Ownership Of Guns Essay Research Paper
Topics for conversation in this report will include: 1. Gun Control and the Markets 2. Victims vs. Criminals 3. Interpretation of Data Gun control assumes some fundamental things to hold true. It assumes that all people are law abiding, responsible, and well intended; we know this is not the case or their would not be a gun debate.
Social Costs Of Unemployment Essay Research Paper
What are the social costs of unemployment? Can unemployment ever be completely cured? Unemployment is what occurs when a person is seeking employment while lacking a job. It occurs all over the world, in every economy and government. It has various effects which affect amny lives.
How Clear Is The Distinction Between Voluntary
And Involuntary Unemployment?? Essay, Research Paper How clear is the distinction between voluntary and involuntary unemployment?? What might lead to an decrease in voluntary unemployment?Economists divide unemployment into five
Oligopoly Essay Research Paper An oligopoly describes
Oligopoly Essay, Research Paper An oligopoly describes a market situation in which there are limited or few sellers. Each seller knows that the other seller or sellers will react to its changes in prices and also quantities. This can cause a type of chain reaction in a market situation. In the world market there are oligopolies in steel production, automobiles, semi-conductor manufacturing, cigarettes, cereals, and also in telecommunications.
Cadillac Essay Research Paper IntroductionNow that we
Cadillac Essay, Research Paper Introduction Now that we have looked at the Cadillac Escalade?s environment and target markets, lets look at the marketing mix to show what cadillac does to influence the demand of the Escalade.
Demand And Supply Essay Research Paper Every
Demand And Supply Essay, Research Paper Every organisation which provides goods or services to fee paying customers must, by its very nature, charge price for that good or service, to
Anaylsis Paper Essay Research Paper Analysis Paper
Anaylsis Paper Essay, Research Paper Analysis Paper 1 The EIA predicted Midwestern Illinois families to be spending as much as 40% more on heating this year compared to last year because of higher natural gas prices. The increase in price is largely due to the reduction of natural gas supplied.
Cayley
’s Sextic Essay, Research Paper The curve, Cayley?s Sextic can be described by the Cartesian equation: 4(x^2 + y^2 ? ax)^3 = 27a^2(x^2 + y^2)^2. It is the involute of a nephroiod curve because of its slight kidney shape and because they are parallel curves. This curve was first discovered by a mathematician by the name of Colin Maclaurin.
The Fed Essay Research Paper Federal Reserve
The Fed Essay, Research Paper Federal Reserve and the Economic Bubble On Tuesday, November 16, 1999, the Federal Reserve Board will decide whether or not to tighten monetary policy at the Federal Open Market Committee meeting. Throughout the year the Fed has been somewhat hesitant to raise rates, which could slow the economy.
Ripple Effects Upon Economy Essay Research Paper
There are several things that can cause a ripple effect in our economy. There are economic facts, or things that will happen no matter what, that start to affect more and more people, until they sooner or later effect everybody. The
SupplyDemand And The Theories Of Location Essay
, Research Paper Economic theories of supply and demand provide a clear indication of the effectiveness of free markets in the allocation of land resources. Changes in the costs associated with accessibility have resulted in a free market move of population away from traditional city centres.
America Online Essay Research Paper America Online
America Online Essay, Research Paper America Online To Unveil Flat Fee For Internet Access The Internet is becoming more popular and more widely used, and the Market for internet access is growing rapidly. To stay
Summary Of Pure Competition Essay Research Paper
There are four major types of markets. They are: Pure Competition: Large number of buyers and sellers trading a standardized product (corn, wheat); Pure Monopoly: One seller, firm is the industry; Monopolistic Competition: Large number of buyers, large number of sellers each selling a similar but slightly differentiated product (cigarettes); Oligopoly: Very few sellers that acknowledge that decision of one firm affects the others and takes this fact into account when making production or pricing decisions.
Untitled Essay Research Paper Jennifer Loughery
Untitled Essay, Research Paper Jennifer Loughery Back in the middle of October, the price of natural-gas had risen because a gas company was forced to shut down a pipeline due to the need for repairs. This
Consumer Decision On Phones Essay Research Paper
Due to the speed of technological advances nowadays, it is increasing difficult for anyone to predict the marketing strategy for an electronic device. As for telephones today, they are becoming more and more sophisticated in both capabilities and application of these capabilities. A potential buyer is nevertheless confronted with decisions cordless or non-cordless, caller ID or no caller ID and so on.
Pure Competition Essay Research Paper Pure CompetitionThere
Pure Competition Essay, Research Paper Pure Competition There are many industries. Economist group them into four market models: 1) pure competition which involves a very large number of firms producing a standardized producer. New firms may enter very easily. 2) Pure monopoly is a market structure in which one firm is the sole seller a product or service like a local electric company.
The Internet Market In Kuwait Essay Research
Paper Many competitive markets have been appeared in Middle East lately, and specially in Kuwait. The One which I will discuss is the Internet competitive market in Kuwait . Internet has been a great demand in all over the world. In 1992, The ministry of communication in Kuwait provided the internet service.
Explain What Is Meant By The Term
An Economic Model Essay, Research Paper Explain what is meant by the term an economic model and outline a model of price and output determination in a free market. Examine the effect of a change in real disposable income on equilibrium price and output.
Marketing Consumer Behavior Essay Research Paper 1
Marketing Consumer Behavior Essay, Research Paper 1. (a) The types of market segments currently existing for the Hummer in the consumer market are generally men with household incomes varying between 200 and 300 thousand dollars per year. Most of these men already own two or three cars. More doctors will purchase Hummers than lawyers.
Perfect Competition Vs Monopoly Essay Research Paper
1. Analyze the fast food industry from the point of view of perfect competition. Include the concepts of elasticity, utility, costs, and market structure to explain the prices charged by fast food retailers.
Coca Cola Bad For You Essay Research
Paper Coca – Cola Bad for you. On the 14th of June Coca-Cola?s soft drinks were banned from the markets in Belgium and later also in Luxemburg and France. Two failures in the bottling system were the cause for the nausea that the people suffered. According to the article it would have been better if they would have acted fast and told the whole truth.
Economic Report Essay Research Paper Demand In
Economic Report Essay, Research Paper Demand In economics, we need to use terms a little more carefully than they are sometimes used in ordinary discussions. In general use, “Demand” is a word that can have more than one meaning, but in microeconomics we define it more carefully so that it has only one meaning.
Technological Impact Essay Research Paper Technological Impact
Technological Impact Essay, Research Paper Technological Impact. + Changes in market demand+ Marketing strategy: – As a company devpelopes and matures it will have to changes it’s marketing strategy to compete and grow with other companies that are challenging the present company. I will take the car industry for an example.
Do Higher Wages Cause Higher Prices Or
Do Price Rises Cause Wage Rises? Essay, Research Paper Do higher wages cause higher prices, or do price rises cause wage rises?? What are the policy implications in either case?Inflation involves
Heilbroner
’s Worldly Philosphers Essay, Research Paper 1. People looking to trade in their old car for money off of their new car become discouraged with the low trade in value, and decide either not to buy a new car at all or to buy a cheaper model. The lower car sales is a reduction in demand, because the decrease in resale value of used cars is not changing the prices of the new cars, as a change in quantity demanded would suggest, it is changing what people are willing to pay for the cars.
Econ Essay Research Paper Moneycommodity money Fiat
Econ Essay, Research Paper Money-commodity money, Fiat. Money supply=currency in hands of public+other assetsas means of payment (demand deposits, traverler’s checks, savings accounts, time deposits, mutual funds)
Supply And Demand Essay Research Paper Market
Supply And Demand Essay, Research Paper Market demand is best defined as each consumer s demand for a particular product, or each firm s demand for a particular factor. The law of demand specifies that the amount demanded varies inversely with price . The following diagram can best demonstrate this. The table shows the maximum rate of purchase.
Law Of Demand No Way To Be
Proven Wrong Essay, Research Paper Law of Demand is an assertion. We need not question it if its testable implications have not yet been refuted. But quite a lot of people always challenge such a law and doubt its predictive power.
Supply and demand
A theory of price. Analysis of Markets. Simple Supply and Demand curves. Demand curve shifts. Supply curve shifts. Effects of being away from the Equilibrium Point. Vertical Supply Curve. Other market forms. Discrete Example. Application: Subsidy.