APPLICATIONS

Application 1:
Do all demand curves slope
downward?

Demand curves can slope upward

consumers can sometimes violate the law of demand and buy

more of a good when the price rises.

Giffen goods : inferior goods for which the income effect

dominates the substitution effect.
Q

example: lower quality staple food (cassava)

The price of potatoes rises,

the consumers optimum
shifts from point C to point
E. In this case, the
consumer responds to a
higher price of potatoes by
buying less meat and more
potatoes

Application 2:
How Do Wages Affect Labour
Supply?
The theory of consumer choice can be used to
analyze how a person decides to allocate his time
between work and leisure.
Labor supply curve slopes upward when substitution
effect is greater than the income effect
Labor supply curve slopes backward when income
effect is greater than the substitution effect

The Work-Leisure Decision

Copyright 2014 by Nelson Education Ltd.

An Increase in the Wage

Application 3:
How Do Interest Rates
Affect Household Saving?
We can use the theory of consumer choice to analyze how
people make this decision and how the amount they save
depends on the interest rate their savings will earn.
An increase in interest rate results in an increase in saving when
young
or
An increase in interest rate results in a decrease in saving when
young

The ConsumptionSaving Decision

An Increase in the Interest Rate