movement along the demand curve
An increase in the price of one good holding tastes, income, and the price of other goods constant
Cobb-Douglas utility function
the demand for each good depends only on its own price and not the price of the substitute good
price-consumption curve
the line through the equilibrium bundles that are consumed at each price, budget being held constant; upward sloping
income-consumption curve
the curve through the bundles that are consumed as income increases
Engel curve
shows the relationship between the quantity demanded of a single good and income, holding prices constant
income elasticity of demand
the percentage change in the quantity demanded in response to a given percentage change in income
inferior good
income elasticity < 0; less is demanded as income rises
normal good
income elasticity > or equal to 0; more is demanded as income rises
luxury good
income elasticity > 1; demand of a good rises more than in proportion to income
necessity
income elasticity is between or equal to 0 and 1; demand of a good rises less than or in proportion to income
more-is-better assumption
By the ____________ ______________, there is a bundle on the budget constraint that gives more utility than any given bundle inside the constraint
budget share
theta; (price* quantity)/income
The weighted sum of income elasticities equals...
...one" (theta1xi1 + theta2xi2 + ... + thetanxin = 1)
substitution effect
the change in the quantity of a good that a consumer demands when the good's price rises, holding other prices and the consumer's utility constant
income effect
the change in the quantity of a good a consumer demands because of a change in income, holding prices constant; affects buyer power
The substitution effect.... (price)
... is the change in the quantity demanded from a compensated change in the price of another good.
inferior good (income vs. substitution effect)
the income effect goes in the opposite direction from the substitution effect
Giffen good
a good where a decrease in price causes the quantity demanded to fall (upward sloping demand curve)
uncompensated demand curve/ Marshallian demand curve
the "normal" demand curve
compensated demand curve/ Hicksian demand curve
determines how the quantity demanded changes as the prices rise, holding utility constant; measures ONLY the substitution effect
The derivative of the expenditure function with respect to price of good 1...
... is equivalent to the number of units demanded of good 1
substitution elasticity of demand
captures the substitution effect
Slutsky equation
total effect = substitution effect + income effect
income effect of a Giffen good
positive and large relative to the substitution effect
cost-of-living adjustments (COLAs)
government programs that raise prices or incomes in proportion to an index of inflation
inflation
increases in the overall price level
nominal price
the actual price of a good
real price
the price adjusted for inflation (CPInew/CPIold * the nominal price)
consumer price index (CPI)
the cost of a standard bundle of goods; a weighted average of the price increase for each good (weights are the good's budget share)
CPI adjustment
overcompensation for inflation; yields a higher utility; has an upward bias
true cost-of-living index
inflation index that holds utility constant over time
substitution bias/ upward bias
results from CPI adjustment and overcompensation
theory of revealed preferences
used to derive a consumer's indifference curve given different combinations of prices and income levels
revealed to be preferred
where bundle c is determined to be greater than a given that b>a and c>b