Consumer Behavior and Demand

1
Consumer Behavior and Demand

• Chapter 3

2
Characteristics of Consumer Behavior

• Human wants are insatiable
• More is preferred to less

3
Utility

• Utility is defined as the amount of satisfaction
  received from a good or bundle of goods.
• Cardinal measures of utility
• Numbers provide a measure of how much more you
  like one good over another
• Ordinal measure of utility
• Numbers provide a measure preference ranking

4
Cardinal versus Ordinal measures
5
Law of Diminishing Marginal Utility

• As a person consumes additional units of a
  product, they derive less satisfaction from each
  additional unit.
• Marginal Utility is equal to the additional
  utility derived from consuming one more unit of a
  good.

6
Utility from Pizza
7
Utility from Pizza
8
Utility from Pizza
9
Utility from Pizza
10
Utility from Trucks
11
Lets throw in a John Deere tractor
12
Now lets try that Kubota
Wow, would you look at that!
13
Choices in Consumption Lets move from one
good to two now
Pizza Slices
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
14
Choices in Consumption
.
Pizza Slices
This dot represents a consumption bundle for
the consumer In math it is an ordered pair and
can be calculated like this ( Cokes, Pizzas)
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
15
Choices in Consumption
.
Pizza Slices
This dot represents a consumption bundle for
the consumer In math it is an ordered pair and
can be calculated like this ( Cokes,
Pizzas) Therefore this bundle of goods is made
up of one coke and seven pizza slices
7 6 5 4 3 2 1
(1,7)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
16
Choices in Consumption
.
Pizza Slices
Several Ordered Pairs ( Cokes,
Pizzas) These represent different consumption
bundles for the consumer
7 6 5 4 3 2 1
.
.
.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
17
Choices in Consumption
.
Pizza Slices
7 6 5 4 3 2 1
(1,7)
.
.
.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
18
Choices in Consumption
.
Pizza Slices
7 6 5 4 3 2 1
(1,7)
.
(2,5)
.
.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
19
Choices in Consumption
.
Pizza Slices
7 6 5 4 3 2 1
(1,7)
.
(2,5)
.
.
.
(10,1)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
20
Choices in Consumption
.
Pizza Slices
7 6 5 4 3 2 1
(1,7)
.
(2,5)
.
.
.
(6,2)
(10,1)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
21
Choices in Consumption
.
Pizza Slices
7 6 5 4 3 2 1
(1,7)
.
(2,5)
.
.
(3,3)
.
(6,2)
(10,1)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
22
Choices in Consumption
.
Pizza Slices
7 6 5 4 3 2 1
(1,7)
.
(2,5)
.
.
(3,3)
.
(6,2)
(10,1)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
23
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
This line is called an indifference curve
It can be labeled I or U for Utility Curve
I
1 2 3 4 5 6 7 8 9 10 11 12
Coke
24
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Every point on an indifference curve gives the
consumer the same level of utility or
satisfaction
1 2 3 4 5 6 7 8 9 10 11 12
Coke
25
Choices in Consumption
Pizza Slices
Indifference curves are Continuous
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
26
Choices in Consumption
Pizza Slices
Indifference curves are Continuous This one is
not continuous
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
27
Choices in Consumption
Pizza Slices
Indifference curves are Continuous Convex to the
origin
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
28
Choices in Consumption
Pizza Slices
Indifference curves are Continuous Convex to the
origin This is not convex to the
origin
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
29
Choices in Consumption
Pizza Slices
Indifference curves are Continuous Convex to the
origin Fill the plane and never cross
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
30
Choices in Consumption
Pizza Slices
Indifference curves are Continuous Convex to the
origin Fill the plane and never cross These
cross and just make a mess.
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
31
Why cant they cross?
32
Choices in Consumption
Pizza Slices
The farther the indifference curve is away from
the origin the better off the consumer is. The
more of each good they have-)
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
33
Choices in Consumption
Pizza Slices
Better Off Worse Off
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
34
Choices in Consumption
Pizza Slices
Indifference curves are convex to the origin this
gives us the Law of Diminishing Marginal Rate of
Substitution
7 6 5 4 3 2 1
What is means is that we are willing to give up
fewer and fewer slices of pizza to get an
additional coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
35
Choices in Consumption
Pizza Slices
Remember I said we are constrained, in
other words we cant get everything we want. How
is that represented on this graph?
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
36
Choices in Consumption
Pizza Slices
Lets say we have 10 to spend a day on pizza and
coke, what does that constraint look like? Well
we need to know a couple other things like what
are the prices of coke and pizza.
7 6 5 4 3 2 1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
37
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
If the price of pizza is 2 a slice how many can
we afford if we spend all our money income on
pizza?
1 2 3 4 5 6 7 8 9 10 11 12
Coke
38
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
If the price of pizza is 2 a slice how many can
we afford if we spend all our money income on
pizza? The answer is 5 slices.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
39
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
If the price of coke is 1 a glass how many can
we afford if we spend all our money income on
coke?
1 2 3 4 5 6 7 8 9 10 11 12
Coke
40
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
If the price of coke is 1 a glass how many can
we afford if we spend all our money income on
coke? The answer is 10 cokes.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
41
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
These are the two endpoints of what is known as
a budget constraint. You can afford to purchase
one or the other.
.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
42
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
The budget constraint shows every
possible combination of goods that the consumer
can purchase with a certain money income. In
this case its 10
.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
43
Choices in Consumption
Pizza Slices
How do we answer the question of how consumers
choose how much of each to consume? Remember
what a utility curve represents?
7 6 5 4 3 2 1
.
.
1 2 3 4 5 6 7 8 9 10 11 12
Coke
44
Choices in Consumption
Pizza Slices
Which point do you think the consumer will choose
A, B or C? Why did you choose that point?
7 6 5 4 3 2 1
.
.
.
A
B
.
.
I2
C
I1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
45
Choices in Consumption
Pizza Slices
Which point do you think the consumer will choose
A, B or C? Why did you choose that point?
7 6 5 4 3 2 1
.
.
.
A
B
.
.
I2
C
I1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
46
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
What happens to the budget constraint when the
price of a good changes?
BC
1 2 3 4 5 6 7 8 9 10 11 12
Coke
47
Choices in Consumption
Pizza Slices
If the Price of Coke doubles to 2.00 the budget
constraint moves. More specifically it rotates
clockwise with the Pizza slice endpoint staying
the same. It rotates until the coke endpoint is
on 5.
7 6 5 4 3 2 1
BC
1 2 3 4 5 6 7 8 9 10 11 12
Coke
48
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
This is because we can only afford 5 cokes if
when spend all of our income on coke now.
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
49
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
What happens in a case where the prices of both
pizza and coke double?
BC
1 2 3 4 5 6 7 8 9 10 11 12
Coke
50
Choices in Consumption
Pizza Slices
What happens in a case where the prices of both
pizza and coke double? The new budget
constraint shifts inward with the endpoints 2.5
pizza slices and 5 cokes. It is a parallel shift.
7 6 5 4 3 2 1
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
51
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
How does our consumption change now?
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
52
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
How does our consumption change now?
.
A
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
53
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
How does our consumption change now? We move
from point A to Point B.
.
A
.
B
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
54
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Now lets go back to the example where the price
of coke goes from 1 to 2. How does that affect
consumption?
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
55
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Now lets go back to the example where the price
of coke goes from 1 to 2. How does that affect
consumption?
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
56
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Now lets go back to the example where the price
of coke goes from 1 to 2. How does that affect
consumption?
.
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
57
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Now lets go back to the example where the price
of coke goes from 1 to 2. How does that affect
consumption?
.
.
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
58
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Now lets go back to the example where the price
of coke goes from 1 to 2. How does that affect
consumption?
.
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
59
Choices in Consumption
Substitution Effect - when the price of a good
changes relative to another good, we substitute
consumption towards the good that has become
relatively less expensive.
Income Effect - When the price of a good
decreases the consumers real income has risen,
thus creating the potential for consumption of
both goods to increase.
60
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Now lets see how we can use this utility
analysis to map out a demand curve for this
consumer
We start here with the price of coke at 1.
When the price is 1 the consumer buys 5 cokes
and 2.5 slices of pizza.
.
BC1
1 2 3 4 5 6 7 8 9 10 11 12
Coke
61
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Now lets have the price of coke increasing from
1 to 2. How does that affect consumption?
.
.
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
62
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Coke consumption goes from 5 units down to 3
units. The price goes up, consumption goes
down. (Follows the Law of Demand)
.
.
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
63
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Now lets map out this consumers demand curve.
.
.
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
64
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
Now lets map out this consumers demand curve.
How many cokes will this consumer buy at a price
of 1. 5 Cokes
.
.
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
65
Choices in Consumption
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
(5, 1.00)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
66
Choices in Consumption
Pizza Slices
7 6 5 4 3 2 1
How many cokes will this consumer buy at a price
of 2. 3 Cokes
.
.
BC1
BC2
1 2 3 4 5 6 7 8 9 10 11 12
Coke
67
Choices in Consumption
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
(3, 2.00)
.
(5, 1.00)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
68
Choices in Consumption
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
(3, 2.00)
.
(5, 1.00)
1 2 3 4 5 6 7 8 9 10 11 12
Coke
69
Choices in Consumption
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
(3, 2.00)
.
(5, 1.00)
Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
70
Choices in Consumption
Now we need to be able to determine the market
demand curve for a product like this coke for an
individual.
71
Choices in Consumption
Now we need to be able to determine the market
demand curve for a product like this coke for an
individual.
The market demand curve is the horizontal
summation of all individual demand curves for
that particular good.
72
Choices in Consumption
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
(3, 2.00)
.
(5, 1.00)
Janes Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
73
Choices in Consumption
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
.
(2, 1.50)
(5, 1.00)
Bills Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
74
Choices in Consumption
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
(3, 2.00)
.
.
.
(2, 1.50)
(5, 1.00)
(5, 1.00)
Bills Demand Curve for Coke
Janes Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
75
Choices in Consumption
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
(3, 2.00)
.
.
.
.
(4, 1.50)
(2, 1.50)
(5, 1.00)
(5, 1.00)
Bills Demand Curve for Coke
Janes Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
76
Choices in Consumption
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
(3, 2.00)
.
(6, 1.50)
.
(10, 1.00)
Market Demand Curve for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
77
Types of Demand
78
Types of Demand
Elastic Demand - When the quantity response is
relatively large compared to the price change.
79
Types of Demand
Price Coke
Elastic Demand - When the quantity response is
relatively large compared to the price change.
3.50 3.00 2.50 2.00 1.50 1.00 .50
Elastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
80
Types of Demand
Price Coke
Elastic Demand - When the quantity response is
relatively large compared to the price change.
3.50 3.00 2.50 2.00 1.50 1.00 .50
If you lower price total revenue increases
Elastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
81
Types of Demand
How is total revenue calculated?
82
Types of Demand
How is total revenue calculated?
It is the price of the product times the quantity
sold
83
Types of Demand
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
When Price 2
.
Total Revenue 8
Elastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
84
Types of Demand
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
When Price 1
.
Total Revenue 12
Elastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
85
Types of Demand
Inelastic Demand - When the quantity response is
relatively small compared to the price change.
86
Types of Demand
Price Coke
Inelastic Demand - When the quantity response is
relatively small compared to the price change.
3.50 3.00 2.50 2.00 1.50 1.00 .50
Inelastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
87
Types of Demand
Price Coke
Inelastic Demand - When the quantity response is
relatively small compared to the price change.
3.50 3.00 2.50 2.00 1.50 1.00 .50
If you lower price total revenue decreases
Inelastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
88
Types of Demand
Remember total revenue is calculated by the
price of the product times the quantity sold
89
Types of Demand
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
When Price 3
Total Revenue 6
Inelastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
90
Types of Demand
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
When Price 1
.
Total Revenue 5
Inelastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
91
Types of Demand
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
When Price 1
.
Total Revenue 5
Inelastic Demand
1 2 3 4 5 6 7 8 9 10 11 12
Coke
92
Types of Demand
Elasticity of Demand is considered to be Unitary
when the Percentage changes in price and quantity
demanded are the same.
In this case an increase in price doesnt change
the level of income.
93
Types of Demand
How do you calculate the Elasticity of Demand?
Change in Quantity
Price Elasticity of Demand
Change in Price
94
Types of Demand
How do you calculate the Elasticity of Demand?
Q2 - Q1
Q2 Q1
Price Elasticity of Demand
P2 - P1
P2 P1
95
Price Elasticity of Demand

• Ed gt 1, Elastic
• Ed lt 1, Inelastic
• Ed 1, Unitary Elastic

One important note is that all of these
elasticities are negative, So we just take the
absolute value of them. The sign for a Price
elasticity is meaningless.
96
Factors That Influence DemandElasticities

• How many close substitutes there are for the
  product
• Whether or not there are many alternative uses
  for the product
• Whether the product is a major expenditure in the
  consumers budget

97
Factors That Influence DemandElasticities

• What is the difference between a Change
  in Quantity Demanded and a Change in Demand?

98
A change in Quantity Demanded
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
99
A change in Quantity Demanded
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
.
Price goes up from 1 to 3 and the Quantity
Demanded goes down from 5 cokes to 2.
.
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
100
A change in Quantity Demanded
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
Notice the demand curve did not change, However
the consumers position on that Demand curve did
change.
.
.
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
101
A change in Quantity Demanded
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
A change in Quantity Demanded implies A movement
along the demand curve. A price increase implies
that Quantity Demanded decreases.
.
.
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
102
A Change in Demand
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
A change in Demand implies A movement of the the
demand curve.
.
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
103
A Change in Demand
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
A change in Demand implies A movement of the the
demand curve.
.
New Demand for Coke
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
104
A Change in Demand
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
A change in Demand implies A movement of the the
demand curve.
.
.
Now at 3 the consumer demands 4.5 units instead
of the initial 2.
New Demand for Coke
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
105
A Change in Demand
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
A change in Demand implies A movement of the the
demand curve.
.
.
Now at 3 the consumer demands 4.5 units instead
of the initial 2.
Demand is said to have risen For this product.
New Demand for Coke
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
106
What Creates Changes in Demand?

• Population
• Income
• Tastes and Preferences
• Related Product Prices
• Peoples Expectations

107
A Change in Demand from Population
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
An increase in Population shifts the demand
curve outward.
New Demand for Coke
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Coke
108
A Change in Demand from Income
Price Steak
3.50 3.00 2.50 2.00 1.50 1.00 .50
An increase in Income shifts the demand curve
for Steak to the right
New Demand for Steak
Demand for Steak
1 2 3 4 5 6 7 8 9 10 11 12
Steak
109
A Change in Demand from Income
Price Spam
3.50 3.00 2.50 2.00 1.50 1.00 .50
An increase in Income shifts the demand curve
for Spam or Rice to the left
New Demand for Spam
Demand for Spam
1 2 3 4 5 6 7 8 9 10 11 12
Spam
110
A Change in Demand from a Change in Tastes and
Preferences
Price Health Food
3.50 3.00 2.50 2.00 1.50 1.00 .50
An increase in Health Concerns shifts the demand
curve for Health Food to the right
New Demand for Health Food
Demand for Health Food
1 2 3 4 5 6 7 8 9 10 11 12
Q Health Food
111
A Change in Demand from a Change in the price of
a Related Good
Price Coke
3.50 3.00 2.50 2.00 1.50 1.00 .50
An increase in the price of Pepsi shifts the
demand curve for Coke to the right
They are Substitutes
New Demand for Coke
Demand for Coke
1 2 3 4 5 6 7 8 9 10 11 12
Q Coke
112
A Change in Demand from a Change in the price of
a Related Good
Price Hamburgers
3.50 3.00 2.50 2.00 1.50 1.00 .50
An increase in the price of French Fries shifts
the demand curve for Hamburgers to the left
They are Complements
New Demand for Hamburgers
Demand for Hamburgers
1 2 3 4 5 6 7 8 9 10 11 12
Q Hamburgers
113
A Change in Demand from a Change in Consumers
Expectations
Price Gasoline
3.50 3.00 2.50 2.00 1.50 1.00 .50
If consumers expect there to be a shortage On
gasoline, then the demand curve for Gasoline will
shift to the right.
New Demand for Gasoline
Demand for Gasoline
1 2 3 4 5 6 7 8 9 10 11 12
Q Gasoline
114
Income Elasticities
Change in Quantity of Product
Income Elasticity
Change in Income of Consumer
115
Income Elasticities
Engel Curve The relationship between the
consumers income and the quantity he or she
purchases of an item.
116
Engel Curve for Food
Quantity Food Purchased
1 2 3 4 5 6 7 8 9 10 11 12
Weekly Income in 000s
117
Engel Curve for Clothing
Quantity Clothing Purchased
1 2 3 4 5 6 7 8 9 10 11 12
Weekly Income in 000s
118
Income Elasticities
Q2 - Q1
Q2 Q1
Income Elasticity
I2 - I1
I2 I1
119
Income Elasticities

• Ei gt 0, Normal Good
• Ei lt 0, Inferior Good
• Eigt 1, Luxury
• Eilt 1, Necessity

120
Cross Price Elasticities
Cross Price Elasticities measure the
responsiveness Of Demand for good 1 to a change
in the price of good 2
Answers the question How does the quantity
demanded of coke Change from a change in the
price of pepsi?
121
Cross Price Elasticities
Coke and Pepsi
For Substitutes An increase in the price of one
Will increase the demand of the other. The
Cross Elasticity of Coke for Pepsi is gt 0 Ec,pgt0
122
Cross Price Elasticities
Hamburgers and French Fries
For Complements An increase in the price of one
will decrease the demand of the other. The
Cross Elasticity of Hamburgers for French Fries
is lt 0 Eh,ff lt0