個 體 經 濟 學 一

Microeconomics (I)

Ch4. Comparative Statics and Demand

EX： 𝑢(𝑥, 𝑦) = 2√𝑥 + �𝑦 , 𝑀𝑎𝑥𝑥,𝑦 2√𝑥 + �𝑦 𝑠. 𝑡. 𝑃𝑥 𝑥 + 𝑃𝑦 𝑦 = 𝑚

𝑃
𝐹𝑂𝐶 ⇒ 𝑀𝑅𝑆𝑥𝑦 = 𝑃𝑥
𝑦

𝑃𝑥 𝑥 + 𝑃𝑦 𝑦 = 𝑚
𝑀𝑈 2∗0.5∗𝑥 −0.5 𝑃
𝑀𝑅𝑆𝑥𝑦 = 𝑀𝑈𝑥 = = 𝑃𝑥
𝑦 1 𝑦

1 𝑃𝑥
𝑥 0.5
= 𝑃𝑦

𝑃𝑦 2
𝑥∗ = ------ ①
𝑃𝑥 2

Ｆigure44 :Engel curve

𝑃𝑦 2
+ 𝑃𝑦 𝑦 = 𝑚
𝑃𝑥

𝑃𝑦 2 𝑚 𝑃𝑦
𝑃𝑦 𝑦 = m - 𝑦∗ = − 𝑃 ------ ②
𝑃𝑥 𝑃𝑦 𝑥

𝑚
① → ② 𝑦= 𝑃𝑦
− 𝑥 0.5
 𝑑𝑦
= −0.5 𝑥 −0.5
𝑑𝑥

𝑑2 𝑦
𝑑𝑥 2
= 0.25 𝑥 −1.5 > 0

Ｆigure45 :Price consumer curve

not a Giffen good

X & Y are substitutes
From the demand curves.
𝑃𝑦 2
Ｆigure46 ∶ Demand curve that X&𝑌 substitutes 𝑥∗ = ⇒ 𝑃𝑥 ↑ , 𝑥 ∗ ↓
𝑃𝑥 2

& 𝑃𝑦 ↑ , 𝑥 ∗ ↑
x ∗ independent of income.
𝑚 𝑃𝑦
𝑦 ∗ = 𝑃 − 𝑃 ⇒ 𝑃𝑥 ↑ , 𝑦 ∗ ↑ & 𝑃𝑦 ↑ , 𝑦 ∗ ↓ & 𝑚 ↑ , 𝑦 ∗ ↑ 𝑌 is a normal good.
𝑦 𝑥

Market demand = Sum of the individual demand

EX： Inverse demand function： Demand curve
consumer A： 𝑃𝑥 = 10 - 2𝑋𝐴 , 𝑋𝐴 = 5 − 0.5𝑃𝑥
5 1
B： 𝑃𝑥 = 5 - 3𝑋𝐵 , 𝑋𝐵 = 3 − 3 𝑃𝑥

1
C： 𝑃𝑥 = 12 - 6𝑋𝐶 , 𝑋𝐶𝐵 = 2 − 6 𝑃𝑥

Ｆigure47 ∶Horizontal aggregation in Demand curve

12 ≤ 𝑃𝑥 ⇒ 𝑋𝐴 = 0, 𝑋𝐵 = 0, 𝑋𝐶 = 0 , 𝑥 = 𝑋𝐴 + 𝑋𝐵 + 𝑋𝐶 = 0
1 1
10 ≤ 𝑃𝑥 ≤ 1 ⇒ 𝑋𝐴 = 0, 𝑋𝐵 = 0, 𝑋𝐶 = 2 − 6 𝑃𝑥 , 𝑥 = 𝑋𝐶 = 2 − 6 𝑃𝑥

1 1 2
5 ≤ 𝑃𝑥 ≤ 10 ⇒ 𝑋𝐴 = 5 − 2 𝑃𝑥 , 𝑋𝐵 = 0, 𝑋𝐶 = 2 − 6 𝑃𝑥 , 𝑥 = 𝑋𝐴 + 𝑋𝐶 = 7 − 3 𝑃𝑥

1 5 1 1 26
0 ≤ 𝑃𝑥 ≤ 5 ⇒ 𝑋𝐴 = 5 − 2 𝑃𝑥 , 𝑋𝐵 = 3 − 3 𝑃𝑥 , 𝑋𝐶 = 2 − 6 𝑃𝑥 , 𝑥= 3
− 𝑃𝑥

*Conclusion： 1. Market demand "curve" is the "horizontal" sum of the individual

demand curves.
2. Individual demand curves are downward sloping.
⇒ market demand curve is downward sloping.
*Property of the market demand curve：
Downward sloping (usually)
slope represents quantity demanded depends on price.
price ↓ , quantity demanded ↑
⇒ sensitivity of the change of the quantity demanded with the change with
the change in price ( price of other good, income, ... other determinants)

*Price Elasticity of demand (of good X)

∆𝑥
percentage change in quantity demanded of X
𝜀𝑥𝑝 = � 𝑥
∆𝑃𝑥 �=| percentage change in price of X
|
𝑃𝑥

∆𝑥 𝑃𝑥
=| ∆𝑃𝑥 𝑥
|

slope of the demand function

𝑑𝑥
𝜀𝑥𝑝 depends on , 𝑃𝑥, 𝑥
𝑑𝑃𝑥
determinants ：
1. property of the good X (necessity ?)
2. substitute availability
3. the proportion of the expenditure of X with respect to the income.
4. time frame.

𝜀𝑥𝑝 = 1 unit elastic

𝜀𝑥𝑝 > 1 elastic
𝜀𝑥𝑝 < 1 inelastic.
𝜕𝑥 𝑃𝑥
if 𝑃𝑥 → 0 , 𝜀𝑥𝑝 = | 𝜕𝑃 |
𝑥 𝑥
 Ｆigure48 ∶ Elasticity concept (change in X response to P)
Px2
(x )
2
𝑥2 −𝑥1 𝑃𝑥1
𝜀𝑥𝑝 = �𝑃 � (point elasticity of demand)
𝑥2 −𝑃𝑥1 𝑥1
𝑃𝑥1 +𝑃𝑥2 𝑃𝑥1 +𝑃𝑥2
𝑥 −𝑥 𝑥 −𝑥 𝑥 −𝑥 𝑃𝑥1 +𝑃𝑥
𝜀𝑥𝑝 = �𝑃 2 −𝑃1 2
𝑥1 +𝑥2 � = �𝑃 2 −𝑃1 2
𝑥1 +𝑥2 � = �𝑃 2 −𝑃1 �( arc elasticity of demand)
𝑥2 𝑥1 𝑥2 𝑥1 𝑥2 𝑥1 𝑥1 +𝑥
2 2

∆𝑥
𝑝 ∆𝑥 > 0 ⇒ 𝑃𝑥 𝑋 ↑
𝜀𝑥 =� 𝑥
∆𝑃𝑥 �
𝑃𝑥
∆𝑃𝑥 < 0 ⇒ 𝑃𝑥 𝑋 ↓

𝑃𝑥 𝑋
𝑃𝑥 changes ⇒ Total expenditure of X doesn't change if 𝜀𝑥𝑝 = 1
𝑃𝑥 ↓ ↑ ⇒ 𝑥 ↑ ↓ and 𝜀𝑥𝑝 > 1
⇒ expenditure of 𝑋 ↑ ↓
𝑃𝑥 ↓ ↑ ⇒ 𝑥 ↑ ↓ and 𝜀𝑥𝑝 < 1
⇒ expenditure offixedX ↓↑
𝑒𝑥 = 𝑃𝑥 𝑥 x (𝑃𝑥 , 𝑃𝑦 , 𝑚 , … ..)
𝑑𝑒𝑥 𝑑𝑃𝑥 𝑥 𝑃𝑥 𝑑𝑥 𝑥 𝑑𝑃𝑥
= = +
𝑑𝑃𝑥 𝑑𝑃𝑥 𝑑𝑃𝑥 𝑑𝑃𝑥

𝑑𝑥
= 𝑃𝑥 𝑑𝑃 + x
𝑥

𝑑𝑥 𝑃𝑥
= 𝑥 ( 𝑑𝑃 + 1)
𝑥 𝑥

= 𝑥 ( 1 − 𝜀𝑥𝑝 )

𝑑𝑒𝑥 𝑑𝑃𝑥 𝑥
= <0 if 𝜀𝑥𝑝 > 1 elastic
𝑑𝑃𝑥 𝑑𝑃𝑥
𝑑𝑒𝑥 𝑑𝑃𝑥 𝑥
= >0 if 𝜀𝑥𝑝 < 1 inelastic.
𝑑𝑃𝑥 𝑑𝑃𝑥

𝑑𝑒𝑥 𝑑𝑃𝑥 𝑥
= =0 𝑖𝑓 𝜀𝑥𝑝 = 1 unit elastic
𝑑𝑃𝑥 𝑑𝑃𝑥

＊Special case
1.Horizontal demand curve

𝜀𝑥𝑝 →∞ at all points on the demand curve.

Ｆigure49 ∶Perfect elastic Demand

2.Vertical demand curve

非用不可的商品 ex.癌症治療藥物
𝜀𝑥𝑝 =0

Ｆigure50 ∶perfect inelastic Demand

 3.Linear demand curve
𝑑𝑥 𝑃𝑥
𝑃𝑥 = a-bX 𝜀𝑥𝑝 at d =�𝑑𝑃 �
𝑥 𝑥

𝑎 𝑃𝑥 1 𝑎−𝑏𝑋 𝑜𝑎 𝑓𝑎
X= 𝑏
− =�𝑏 � note that b= =
𝑏 𝑥 𝑜𝑐 𝑓𝑑

𝑓𝑑 𝑜𝑓
= 𝑓𝑎 ∙ 𝑜𝑔

𝑜𝑔 𝑜𝑓
= 𝑓𝑎 ∙ 𝑜𝑔

𝑑𝑐
= 𝑑𝑎

Ｆigure51:Elasticity of linear Demand curve

 𝜀𝑥𝑝 = 1 if dc = da
i.e. d is exactly the middle point of the demand curve.
 Ｆigure52 ∶Elasicity of linear demand curve

𝑑𝑥 𝑃𝑥
𝜀𝑥𝑝 at d =�𝑑𝑃 �
𝑥 𝑥

1 𝑜𝑓
=� 𝑎𝑓 ∙ 𝑜𝑔
�
𝑓𝑑

fd of
= af ∙ og

og of
= ∙ og
af

of dc
= af = da

p d′ c ′ dc
εx at d = ′ ′ >
da da

Ｆigure53 ∶ Price elasticity at demand

 𝐩
＊Demand curve with 𝛆𝐱 = 𝟏 at all points in the demand curve.
Px1 X1 = Px2 X2
Px X = constant = −e
e
X= Px
= ePx −1

p dx Px
εx = � ∙ �
dPx x
e Px
= �− P ∙ e �
x2 Px

= |−1|
=1

Ｆigure54 ∶Demand curve

𝐩
＊another formula of 𝛆𝐱
𝑑𝑙𝑛𝑥 1 1
𝑑𝑥
=𝑥 dlnx = 𝑥
∙dx

𝑑𝑙𝑛𝑃𝑥 1 1
=𝑃 dln𝑃𝑥 = ∙d𝑃𝑥
𝑑𝑃𝑥 𝑥 𝑃𝑥
1
𝑑𝑙𝑛𝑥 𝑑𝑥 𝑑𝑥 𝑃𝑥 𝑑𝑙𝑛𝑥
𝑑𝑙𝑛𝑃𝑥
= 𝑥
1 = 𝑑𝑃 => 𝜀𝑥𝑝 = �𝑑𝑙𝑛𝑃 �
𝑑𝑃𝑥 𝑥 𝑥 𝑥
𝑃𝑥

𝑑𝑙𝑛𝑥
�𝑑𝑙𝑛𝑃 � = 𝜀
𝑥

𝑑𝑙𝑛𝑥 𝑙𝑛𝑥=𝑠 𝑑𝑙𝑛𝑥 𝑑𝑠

𝑑𝑙𝑛𝑃𝑥
= −𝜀 Let 𝑙𝑛𝑃𝑥 =𝑡 𝑑𝑙𝑛𝑃𝑥
= 𝑑𝑡

𝑑𝑠
∫ 𝑑𝑡 𝑑𝑡 = 𝑠 = 𝑙𝑛𝑥
 𝜀𝑥𝑝 = ε some constant at all points on a demand curve.
𝑒
𝑥 = 𝑒𝑃𝑥 −𝜀 = 𝑃 𝜀 constant
𝑥

𝑑𝑙𝑛𝑥 𝑑𝑙𝑛𝑒𝑃𝑥 −𝜀 𝑑(𝑙𝑛𝑒−𝜀𝑙𝑛𝑃𝑥 )

𝜀𝑥𝑝 = �𝑑𝑙𝑛𝑃 � = � �=� �
𝑥 𝑑𝑙𝑛𝑃𝑥 𝑑(𝑙𝑛𝑃𝑥 )

−𝜀𝑑𝑙𝑛𝑃𝑥
=� � = |−𝜀| = 𝜀
𝑑𝑙𝑛𝑃𝑥
p
Suppose εx = ε Demand function x = ?
𝑑𝑙𝑛𝑥 𝑑𝑙𝑛𝑥
𝜀𝑥𝑝 = �𝑑𝑙𝑛𝑃 � = − 𝑑𝑙𝑛𝑃
𝑥 𝑥

𝑑𝑙𝑛𝑥 𝑑𝑙𝑛𝑥
− 𝑑𝑙𝑛𝑃 = 𝜀 𝑑𝑙𝑛𝑃𝑥
= −𝜀
𝑥

𝑑𝑙𝑛𝑥
∫ 𝑑𝑙𝑛𝑃 𝑑𝑙𝑛𝑃𝑥 = ∫ −𝜀𝑑𝑙𝑛𝑃𝑥
𝑥

lnx = −𝜀𝑑𝑙𝑛𝑃𝑥 + 𝐶
𝑥 𝑙𝑛𝑥 = 𝑒 −𝜀𝑑𝑙𝑛𝑃𝑥 +𝐶
−𝜀
X = 𝑒 −𝜀𝑑𝑙𝑛𝑃𝑥 𝑒 𝑐 = 𝑒 𝑐 𝑒 𝑙𝑛𝑃𝑥 = 𝑒 𝑐 𝑃𝑥 −𝜀

＊Income elasticity of demand

∆𝑥
∆𝑥 𝑚
𝜀𝑥𝑚 = 𝑥
∆𝑚 = ∆𝑚 𝑥
𝑚

∆m→0
𝜕𝑥 𝑚
𝜀𝑥𝑚 = 𝜕𝑚 𝑥 Engel curve given

X = x(𝑃𝑥 , 𝑃𝑦 , m) X = x(mj𝑃𝑥 , 𝑃𝑦 )

Ｆigure55 ∶use engel curve to demostrate income elasticity

 𝜀𝑥𝑚 at d = ?
𝜕𝑥 𝑚
𝜀𝑥𝑚 = 𝜕𝑚 ∙ 𝑥
at d

𝑓𝑑 𝑜𝑓
= 𝑓𝑎
∙ 𝑜𝑔

𝑜𝑔 𝑜𝑓 𝑓𝑜 𝑑𝑐
= 𝑓𝑎 ∙ 𝑜𝑔 = 𝑓𝑎 = 𝑑𝑎

Ｆigure56 ∶use engel curve to demostrate income elasticity

＊Definition: 𝜀𝑥𝑚 < 0 => inferioi good m↑, x*↓

0 < 𝜀𝑥𝑚 < 1 => necessity
𝜀𝑥𝑚 > 1 => luxury

＊Cross Elastivity of Demand

∆𝑥
∆𝑥 𝑃𝑦
X = x(Px, Py, m) 𝜀𝑥𝑦 = 𝑥
∆𝑃𝑦 = ∆𝑃
𝑦 𝑥
𝑃𝑦

∂x Py
∆ Py→0 εxy = ∂P
y x

𝜀𝑥𝑦 > 0 => X & Y are substitutes.

𝜀𝑥𝑦 < 0 => X & Y are complements.
Budget constraint
𝑃𝑥 𝑥 + 𝑃𝑦 𝑦 = 𝑚
𝑒𝑥 𝑒𝑦
ex + ey = m => +𝑚=1
𝑚

share of expenditure Sx + Sy = 1
𝜕𝑥 𝜕𝑦 𝜕𝑚
𝑃𝑥 𝜕𝑚 + 𝑃𝑦 𝜕𝑚 = 𝜕𝑚 = 1

𝑃𝑥 𝑋 𝜕𝑥 𝑚 𝑃𝑦 𝑦 𝜕𝑦 𝑚 𝑒𝑥 𝑚 𝑒𝑦
∙ 𝜕𝑚 ∙ + ∙ 𝜕𝑚 ∙ = 𝜀 + 𝑚 𝜀𝑦𝑚 = 1
𝑚 𝑥 𝑚 𝑦 𝑚 𝑥

𝑆𝑥 𝜀𝑥𝑚 + 𝑆𝑦 𝜀𝑦𝑚 = 1
𝜀𝑥𝑚 < 0 inferior good => 𝜀𝑦𝑚 > 0
𝑚
furthermore 𝜀𝑦 > 1 => Y is luxury.

0 < εm 𝑚
x < 1 necessity => 𝜀𝑦 > 1 => Y is luxury.

＊Homogeneous Function
Def：
f(x, y) is homogeneous od degree k in X and Y
if f(tx, ty) = tkf(x, y) for all t > 0

n variable, o<m<n
Def：f(x1, x2, …, xn) is homogeneous of degree k in x1, x2, …, xm
if f(tx1, tx2, …, txm, xm+1, …, xn) = tkf(x1, x2, …, xn)
for all t > 0

Example 1:
𝑥 𝑦
u(x, y) = min{3 , 2}

𝑡𝑥 𝑡𝑦 𝑥 𝑦
u(tx, ty) = min{ 3 , 2 } = t min{3 , 2}

= t u(x, y)
𝑥 𝑦
k = 1 => u(x, y) = min{3 , 2} is homogeneous of degree 1 in X and Y

Example 2:
# of boxes of Coke
u(x, y) = 24x + 6y # of six−pack Coke

u(tx, ty) = 24tx + 6ty = t(24x + 6y)

=t u(x, y)
k = 1 => u(x, y ) = 24x + 6y is homogeneous of degree 1 in X and Y.
Example 3: Cobb-Douglas utility function
u(x, y) = x0.2y0.4
u(tx, ty) = (tx)0.2(ty)0.4 = t0.6x0.2y0.4
= t0.6 u(x, y)
x0.2y0.4 is homogeneous of degree 0.6 inX and Y.

Example 4: u(x, y) = x0.5 + y

u(tx, ty) = (tx)0.5 + ty
= t0.5 (x0.5+t0.5y) ≠u(x, y)
can’t be arranged in tk(x0.5 + y) form
=> u(x, y ) = x0.5 + y isn’t a homogeneous fct.

Example 5: Demand function

x* = x(Px, Py, m) x(tPx, tPy, tm) =? tk x(Px, Py, m)
y* = y(Px, Py, m) y(tPx, tPy, tm) =? tk y(Px, Py, m)
Are demand function homogeneous?
If yes, in which rariables?
(1) 𝑚𝑎𝑥𝑥,𝑦 𝑢(𝑥, 𝑦)
s.t. 𝑃𝑥 𝑥 + 𝑃𝑦 𝑦 = 𝑚
𝑀𝑢 𝑃𝑥
FOC => 𝑀𝑅𝑆𝑥𝑦 (= 𝑀𝑢𝑥 ) =
𝑦 𝑃𝑦

𝑃𝑥 𝑥 + 𝑃𝑦 𝑦 = 𝑚
=> x* = x(Px, Py, m)
y* = y(Px, Py, m)

(2) maxx,y 𝑢(𝑥, 𝑦)

s.t. 𝑡𝑃𝑥 𝑥 + 𝑡𝑃𝑦 𝑦 = 𝑡𝑚
𝑀𝑢 𝑃𝑥
FOC => 𝑀𝑅𝑆𝑥𝑦 (= 𝑀𝑢𝑥 ) =
𝑦 𝑃𝑦

𝑡𝑃𝑥 𝑥 + 𝑡𝑃𝑦 𝑦 = 𝑡𝑚 => 𝑃𝑥 𝑥 + 𝑃𝑦 𝑦 = 𝑚

 x* = x(tPx, tPy, tm) = x(Px, Py, m)

y* = y(tPx, tPy, tm) = y(Px, Py, m)
solved in (2) solved in (1)
k
t = 1 => k = 0
 Demand function x(Px, Py, m), y(Px, Py, m) are homogeneous of degree 0 in Px, Py
and m. Money illusion 貨幣幻覺
 suppose f(x, y) is homogeneous of degree k in X and Y
f(tx, ty) = tk f(x, y) for all t>0
𝑑𝑓(𝑡𝑥,𝑡𝑦) 𝑑𝑡 𝑘 𝑓(𝑥,𝑦)
=
𝑑𝑡 𝑑𝑡
𝑑𝑡𝑥 𝑑𝑡𝑦
𝑓𝑥 𝑑𝑡
+ 𝑓𝑦 𝑑𝑡
= 𝑘𝑡 𝑘−1 𝑓(𝑥, 𝑦)

𝑓𝑥 𝑋 + 𝑓𝑦 𝑌 = 𝑘𝑡 𝑘−1 𝑓(𝑥, 𝑦)
Let t = 1, 𝑓𝑥 𝑋 + 𝑓𝑦 𝑌 = 𝑘𝑓(𝑥, 𝑦) Euler Teorem Equation

An application of Euler Teorem

x* = x(Px, Py, m) are homogeneous of degree k
y* = y(Px, Py, m) in Px, Py and m

According to Euler Teorem, we have

𝜕𝑥 𝜕𝑥 𝜕𝑥 𝑚
𝜕𝑃𝑥
∙ 𝑃𝑥 + 𝜕𝑃 ∙ 𝑃𝑦 + 𝜕𝑚 ∙ 𝑥
= 𝑘𝑥 = 0
𝑦

𝜕𝑥 𝑃𝑥 𝜕𝑥 𝑃𝑦 𝜕𝑥 𝑚
x≠0, 𝜕𝑃𝑥
∙ + 𝜕𝑃 ∙ + 𝜕𝑚 ∙ =0
𝑥 𝑦 𝑦 𝑥

−𝜀𝑥𝑝 + 𝜀𝑥𝑦 + 𝜀𝑥𝑚 = 0

∆𝑥
∆𝑥 𝑃𝑥
� 𝑥
∆𝑃𝑥 �= ∆𝑃𝑥 𝑥
𝑃𝑥