Review Class Three

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Review Class Three
2
Outline

• A typical consumer will satisfy himself as much
  as possible with limited resources.
• Three factors of demand
• price, income and preference
• Now we can obtain the demand function, and carry
  out the comparative statics.

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Demand function

• Arithmetical method
• Eg. Given the utility function that
• Seek for the demand function arithmetically?
• Solution

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Demand function

• Key point
• Lagrangian method
• Two properties
• 1)
• 2)

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Demand function

• Warning the preceding two properties only hold
  for the tangency case.
• In order to obtain the demand, we can also use
  the geometrical tools.
• Find the highest IC in the budget set!
• Interior solution Tangency case and kinky case
• Boundary solution
• Some examples

6
Choosing tax

• The government can choose the lump-sum tax rather
  than quantity tax to let the typical consumer
  feel better with its tax revenue constant.

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Comparative statics(1)

• How does the demand of one good change
  corresponding to the change in income with the
  prices constant?
• Def. income offer curve and Engle curve
• For different types of goods
• For different types of preferences (H.M)

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Comparative statics(1)

• Def. normal goods(p97) and inferior goods(p98)
• Def. luxury goods and necessary goods(p101)
• To make the def. more clearly, we can impose the
  def. of income elasticity of demand.

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Comparative statics(1)

• Arithmetical form
• Geometrical meaning
• The ratio of the slope of the ray and the slope
  of the tangent line of some point on the Engle
  curve.

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Comparative statics(1)

• Strict def.
• Normal goods
• Inferior goods
• Luxury goods
• Necessary goods

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Comparative statics(1)

• Distinguish the normal and inferior goods in the
  figures of income offer curve and Engle curve
• Distinguish the luxury and necessary goods in the
  figures of income offer curve and Engle curve

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Comparative statics(1)

• Eg. Income offer curve and Engle curve of the
  Quasilinear case
• Eg. Homothetic preference
• Income offer curve and Engle curve of it are both
  the rays through the origin.

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Comparative statics(2)

• How does the demand of one good change
  corresponding to the change in its price with the
  income and price of the other good constant?
• Def. price offer curve and personal demand curve
• For different types of goods
• For different types of preferences (H.M)

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Comparative statics(2)

• Def. of ordinary goods and Giffen goods
• Def. of substitutes and complements
• In order to describe the def. more clearly, we
  can use the def. partial derivatives.

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Comparative statics(2)

• Ordinary goods
• Giffen goods
• Substitutes
• Complements
• Distinguish the ordinary and Giffen goods in the
  figures of price offer curve and demand curve

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Comments on Exercises
17

• Thank you