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Summary Econ 2014 Chapter 4
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Summary of 6 pages for the course Economics at SUN (Chapter 4)
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ExtraClassesStb 2014...Helping you succeed
Onafhanklik van Stellenbosch Universiteit/ Independent of Stellenbosch University
Economics 214 microeconomics Summary
Chapter 4: Individual and market demand
Price-consumption curve (PCC): curve tracing the utility maximizing combinations of 2 goods as the price
of one good changes. PCC used to construct individual demand curve.
Income-consumption curve (ICC): curve tracing the utility maximizing combinations of 2 goods as a
consumer`s income changes. ICC can be used to construct Engel curve.
Put together by Hilde-Mari van Rooyen (MComm). Contact her at hildemari@extraclassesstb.co.za. Visit our website,
www.extraclassesstb.co.za.
, ExtraClassesStb 2014
...Helping you succeed
Onafhanklik van Stellenbosch Universiteit/ Independent of Stellenbosch University
Engel Curve: curve relating the quantity of a good consumed to income.
Normal good: upward sloping Engel curve (positive slope)
Inferior good: downward sloping Engel curve (negative slope)
Income and Substitution Effects:
Substitution effect: Change in consumption of good x associated with a change in the relative price of
good x, with the level of utility held constant. When the price of x falls, the relative price of x decreases
and the relative price of y increases. Consumers tend to buy more of the good that has become cheaper
(good x) and less of those that are now relatively more expensive (including good y).
Income effect: The change in demand resulting from a change in the real purchasing power of the income
of the consumer, with relative prices held constant. Because one of the goods is now cheaper (x),
consumers enjoy an increase in real purchasing power (their real income in terms of the good that became
cheaper (x), increases).
The income effect is positive for an normal good, because when purchasing power of income
rises, you buy more of the normal good. Income effect supports the substitution effect.
The income effect is negative for an inferior good, because when purchasing power of income
rises, you buy less of the inferior good. Income and substitution effect works in opposite
directions.
Price of X decreases:
When X is a Normal Good: When X is an Inferior Good:
Substitution effect: Q1 → Q2 Substitution effect: Q1 → Q3
Income effect: Q2 → Q3 Income effect: Q3 → Q2
Put together by Hilde-Mari van Rooyen (MComm). Contact her at hildemari@extraclassesstb.co.za. Visit our website,
www.extraclassesstb.co.za.
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