To show what the consumer should do to maximize utility, a budget line must be added to the preferences shown in the indifference curves. The picture below adds one. Point a is not attainable because it lies to the right of the budget line. The consumer is indifferent between points b and d because they lie on the same indifference curve, but point d is cheaper than b because d lies below the budget line. The consumer wants to get on the highest indifference curve affordable, and this will lead him to point c. [pic]

The effect of a rise in the price of good A is shown on the graph below. A higher price of A means that less of A can be purchased, and hence the budget line moves to the left, intersecting the vertical axis at a lower point. Point c is no longer possible and the consumer must move to a new position, which, assuming utility maximization, will be point b. Unless the indifference curves are peculiar, point b will represent less of good A than will point c, which is what the law of demand says will happen. [pic]

Looking at two different prices has produced two different points on an individual's demand curve. By varying the price of good A, other points could be found and an entire demand curve for one individual consumer constructed. The market demand curve is obtained by adding up the demand curves of all individuals. The theory of consumer choice that the indifference curves embody is an elegant construction with which economists frame problems. One of its weaknesses is that a great many outcomes are consistent with it--though a downward-sloping demand curve can be derived from it, so too can an upward sloping demand curve. Further, in recent years there has been a realization among economists that pictures such as those above may not be a good description of the decision-making process when people must make decisions with partial information, with fuzzy goals, under conditions of risk and uncertainty, and when options...

...7(e) The Compensated DemandCurve
Definition: the compensated demandcurve is a demandcurve that ignores the income effect of a price change, only taking into account the substitution effect. To do this, utility is held constant from the change in the price of the good.
In this section, we will graphically derive the compensated demandcurve from indifference curves and budget constraints by incorporating the substitution and income effects, and use the compensated demandcurve to find the compensating variation.
• Let us consider a price increase for a normal good, a good whose demand increases as income increases.
In Figure 7.e.1, assume that the price of Y (PY) is $1, and that the individual has an income of $100. The initial price of X (PX) is $1, so the individual’s initial budget constraint is therefore BC1, with a vertical intercept of 100, and a horizontal intercept of 100. The individual reaches his optimum (maximizes utility) at point A, where his initial budget constraint BC1 is tangent to the indifference curve IC1. Let’s say that at this point, he maximizes his utility by consuming 43 units of good X.
If PX increases from $1 to $2, his budget constraint will rotate inward until it reaches BC2 where there is now a horizontal intercept of 50. The...

...DEMAND AND THE DEMANDCURVE
This note has been prepared by John Glen and Séan Rickard,
Cranfield School of Management, 2002
Introduction The demandcurve (normally drawn as a straight line!)
represents graphically the relationship between the price of a
product and the quantity of that product which is demanded.
Typically the curve slopes down reflecting the fact that a
reduction in price will result in an increase in the quantity
consumed. An understanding of the relationship between
movements in price and movements in quantity demanded
underpins pricing and revenue generation strategies.
Figure 1: Demand for Mars Bars in Cranfield University Shop
Price
(per unit)
A
30p
B
25p
D
5
7
Quantity demanded
per week
Figure 1 is a typical demandcurve; as the unit price of the
chocolate bar falls from 30p to 25p, the quantity consumed
increases from say 5 units to 7 units per week.
Consumption has moved along the demandcurve from A
to B. The demandcurve is fixed in the price–quantity
space on the assumption that all other factors which may
influence the demand for Mars Bars – eg, the consumer’s
income, advertising, the pricing of alternatives – remain
constant. This is the ceteris paribus assumption. Should
any of these other demand factors alter, then the ceteris...

...Literature Review
Demand and supply have been generalized to explain macroeconomic variables in a market economy. The Aggregate Demand-Aggregate Supply model is the most direct application of supply and demand to macroeconomics. Compared to microeconomic uses of demand and supply, different theoretical considerations apply to such macroeconomic counterparts as aggregate demand and aggregate supply. The AD-AS or Aggregate Demand-Aggregate Supply model is a macroeconomic model that explains price level and output through the relationship of aggregate demand and aggregate supply. It is based on the theory of John Maynard Keynes presented in his work “The General Theory of Employment, Interest, and Money”. It is one of the primary simplified representations in the modern field of macroeconomics and is used by a broad array of economists, from libertarian, monetarist supporters of laissez-faire, such as Milton Friedman to Post-Keynesian supporters of economic interventionism, such as Joan Robinson.
Brief history of demandcurve and supply curve
According to Hamid S. Hosseini, the power of supply and demand was understood to some extent by several early Muslim economists, such as Ibn Taymiyyah who illustrates- “If desire for goods increases while its availability decreases, its price rises. On the other hand, if...

...own ethnic group, or (3) there is discrimination against them in other areas of the city. Rents paid are a very high percent of peoples’ incomes. (a) Would the demand for apartments in this area be relatively inelastic or relatively elastic? State why. (b) Would the supply of apartments in this area be relatively inelastic or relatively elastic? State why.
1
(c) Draw the demand and supply curves as you have described them, showing the initial equilibrium price and quantity. Label carefully. (d) Now assume the government creates a rent supplement program. Under this program, the renter is required to pay 30% of income in rent. Any additional rent is paid by the government. For example, a low-income person with an income of $1,000 a month would be required to pay $300 in rent (30%). If the rent is $500, the other $200 would be paid by the government. Analyze the results of this program. Show the changes on the graph and explain what will result. Who gains and who loses from this program? (e) Instead, now assume that the government decides to provide a building subsidy to people who build apartments in this low-income area. A certain percent of their costs will be paid by the government. Analyze the results of this program. Show the results on the graph and explain what will result. 2. Assume that the demandcurve for paper of a certain type is given by Qd = 200 − 5p, where Qd is the number of pounds...

...1. Suppose there are 100 consumers with identical individual demandcurves. When the price of a movie ticket is $8, the quantity demanded for each person is 5. When the price is $4, the quantity demanded for each person is 9. Assuming the law of demand holds, which of the following choices is the most likely quantity demanded in the market when the price is $6? Explain and show calculations,
While the question asks of the choices given what the quantity demanded will be, there are no choices given. Based on the ratio between the numbers previously given in the answer the quantity demanded is most likely 7. This is because it is the median number between 5 and 9 when the price is the median number between 4 and 8. Ergo the quantity demanded for tickets is 7 at the price of $6.
$4 5 tickets
$6
7 tickets
$8 9 tickets
2. When economists say the quantity demanded of a product has increased, they mean the:
The quantity demanded is the amount of a product people are willing to buy at a certain price. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. If the quantity demanded has increased it means two things have occurred. First, the price has decreased, causing a higher demand for the product. Second, there is a large enough supply to keep the supplier and consumer happy.
3. Suppose all of the major computer manufacturers announced...

...marginal utility is never negative.
TRUE
FALSE
2. An individual's Engel curve can be derived from the price-consumption curve.
TRUE
FALSE
3. “U.S.A. should reform its health care system” is a good example of a positive statement.
TRUE
FALSE
4. Consumer surplus is a cardinal measure.
TRUE
FALSE
5. The substitution effect measures the effect of a price change on consumption, keeping
utility constant.
TRUE
FALSE
6. The compensated demandcurve is steeper than the uncompensated demandcurve
when a good is normal.
TRUE
FALSE
7. An increase in income will shift the Engel curve to the right.
TRUE
FALSE
8. The assumption of diminishing marginal utility is violated for perfect substitutes.
TRUE
FALSE
9. The slope of the indifference curve tells us how much money we need to forgo in order
to buy one more unit of good X.
TRUE
FALSE
10. Daniel consumes pizza (x-axis) and sushi (y-axis). The price of pizza is $3 a slice and the
price of a sushi is $6. The MRS at Daniel’s current consumption bundle is 1/3. To
maximize utility Daniel should consume less sushi and more pizza.
TRUE
FALSE
PART II – SHORT ANSWER QUESTIONS
1. Harold regards pizza (x-axis) and burgers (y-axis) as imperfect substitutes. The price of
burgers decreases and Harold consumes the same amount of pizza.
a. Graph this...

...• The demandcurve is flatter (more horizontal) the closer the substitutes for the product and the less diminishing marginal utility is at work for the buyers.
• The dependent variable in demand analysis is the quantity (the number of units) sold. The independent variables are price, income of buyers, the price of substitutes, and the price of complements.
• An increase in income shifts the demandcurve to the right for normal good. It goes to the left for an inferior good.
• An increase in the price of a substitute product shifts the demandcurve to the right. Consider an increase in the price of bagels; bagel buyers shift along their demandcurve to buy less bagels and substitute toward bread, shifting the demandcurve for bread to the right at every price.
• An increase in the price of a complement shifts the demandcurve to the left. When the price of jam rises, jam purchasers substitute along their demandcurve, buying less jam and also less bread. This causes the demandcurve for bread to shift to the left.
• There is a positive relationship between the price and the quantity supplied along the supply curve.
• The supply curve is positively sloped because of increasing costs as output increases
•...

...BEA111 Online Quizzes 1-6
Quiz 1
1. Economics is best defined as the study of how
A. prices and quantities of goods and services are determined in markets
B. private firms and households respond to taxes and subsidies
C. people make choices in the presence of scarcity and the results of those choices.
D. interest rates and exchange rates are determined
2. The scarcity principle implies that
A. people will never be satisfied with what they have
B. as wealth increases, making choices becomes less necessary
C. the prices of scarce goods must rise due to excess demand
D. choices must be made and tradeoffs will occur
3. The 'no-free-lunch' principle is another name for the
A. cost-benefit principle
B. the scarcity principle
C. the ceteris paribus principle
D. the marginal (not average) principle
4. You currently go to the gym three times each week. Each visit costs you $15 and you get $90 worth of benefits from your current weekly gym routine. Given this information
A. you should go to the gym a fourth time each week
B. you should reduce the number of times you go to the gym each week
C. you should not change your gym routine
D. it is impossible to say whether you should go to the gym more often than three times a week
5. To earn her allowance of $30 Janie must either mow the lawn or wash clothes. She dislikes both chores, but prefers working outdoors. If both jobs take the same amount...