1. Changes In Income
A rise in income - with no change in price - leads to a new quantity demanded for each good
Normal good
quantity demanded increases
Inferior good
quantity demanded decreases
Depends on the individual’s preferences

2. Changes In Income Figure 5 Effects of an Increase in Income
Initial Income= $150;
New Income = $300 per month
Pconcert=$30; Pmovie=$10

3. Changes In Income Figure 5 Effects of an Increase in Income 30 27 1512 9 6 3 1 2 4 5 7 8 10
Number of Concerts per Month
Number of Movies per Month
H''
2. If his preferences are as given in the table, he'll choose point H
1. When Max's income rises to $300, his budget line shifts outward. A B C D E F H
3.But different marginal utility numbers could lead him to H' or H'' H'

4. Changes In Price Rotates the budget line rightward
The consumer will select the combination of movies and concerts
On his budget line
Makes him as well off as possible
Marginal utility per dollar spent on both goods is the same

5. Changes In Price Figure 6 Deriving the Demand Curve
Income = $150 per month
Initial: Pconcert=$30; Pmovie=$10;
Change: Pconcert=$10; Pmovie=$10

6. Deriving the Demand Curve
Figure 6 Deriving the Demand Curve
1. When the price of concerts is $30, point D is best for Max. 15 6 3 5 30 10 8 7
Number of Movies per Month
2. If the price falls to $10, Max's budget line rotates rightward, and he chooses point J. K D J
3. And if the price drops to $5, he chooses point K.
Price per Concert
$30 10 5 3 7
Number of Concerts per Month D
4. The demand curve shows the quantity Max chooses at each price. J K

7. The Substitution Effect
As the price of a good falls, the consumer substitutes that good in place of other goods whose prices have not changed.
Change in the relative price
Price decreases - increase quantity demanded
Price increases - decrease quantity demanded

8. The Income Effect As the price decreases - increase purchasing power
Normal goods - increase quantity demanded
Inferior goods - decrease quantity demanded
Price increases - decrease purchasing power

9. Combining Substitution and Income Effect
Normal Goods
Substitution and income effects work together
Must always obey the law of demand
Inferior Goods
Substitution and income effects work against each other
The substitution effect dominates
Virtually always obey law of demand

10. Income and Substitution Effects
Figure 7 Income and Substitution Effects
Price Decrease:
Ultimate Effect
(Almost Always)
Substitution Effect P QD Þ QD QD
if normal
Purchasing Power QD
if inferior
Price Increase:
Substitution Effect P QD Þ QD QD
if normal
Purchasing Power QD
if inferior

11. Consumers in Markets + + = Figure 8 From Individual to Market Demand 412
Jerry
Price $4 3 2 1
George
Price 6 12 $4 3 2 1
Elaine
Price 10 20 $4 3 2 1 + + = C C'
C''
Number of Bottles per Week

12. Deriving the Market Demand Curve
Figure 8 From Individual to Market Demand
Price $4 3 2 1 10 27 44
Number of Bottles per Week A
Market Demand Curve
- obtained by adding up the total quantity demanded by all market participants at different prices B C D E