Chapter 5 – Consumer Demand

Income effects
 When a customer’s income changes the consumption choices also change
Categories of goods:
1. Normal goods – when income increases, consumption increases
2. Inferior goods – when income increases, consumption decreases

Income increases => Consumption increases

Here both products are normal

Spam is inferios and steak is lux

1) Eid < 0 = inferior good

2) Eid < 1 (0,1) = necessity Necessity and luxurious are both
categories of the normal goods
 3) Eid > 1 = luxurious
The rule is:
E > 0 => normal good
E < 0 => Inferior good
Income elasticity of demand = % change in quantity associated with % change in income

Price effects

1. Write the budget constraint and get the X = smth wrt. Y

2. Get the optimality condition (equal slope of the indifference with the slope of the BC)

3. Solve the equation and get the Optimal choice (the combination of quantities that give highest
utility and are on the budget = The solutions of the equation system

Example 1:
- If we decrease the price of the X => there will be a counterclockwise shift in the budget
constraint
- Outward rotation = increase in demand for X
 The last graph shows the relatipnship between the optimized consumption of a good and its price
modifications.
When a person changes their preferences towards a product, the demand curve will shift accordininglyt