Review Class Four
Outlines
 A typical consumer will satisfy himself as much
as possible with limited resources.
 We have built the economic model of demand
for a typical consumer:
 Start: Def. of budget set and preference (utility
function)
 Objectives:1 Find the optimal choice (demand)
2 Comparative statics (income, price)
Outlines
 Two problems about price and income we
should think about seriously:
 We have known How the demand of one
good changes corresponding to the
change in its price with the income and
price of the other good constant, but do
you know the mechanism that forms the
ordinary good or Giffen good? (Ch 8)
 Do you know the source of income? (Ch 9)
Chapter 8
 Slutsky and Hicks decomposition:
 The common ground: the process of the
change in demand corresponding to the
change in the relative price can be
decomposed into substitution effect and
income effect.
Chapter 8
 Def. of substitution effect : the difference
between the new optimal choice and the
original optimal choice with the real income
unchanged and the relative price adjusted.
 Def. of income effect : the difference
between the final optimal choice and the
optimal choice with the real income unchanged
and the relative price adjusted.
Chapter 8
 Slutsky and Hicks decomposition:
 The differentia: the def. of “unchanged real income”
 Slutsky:
 After the change in the relative price, the typical
consumer is still able to buy the original optimal
consumption bundle. (Keep the purchasing
power constant before and after the change in
the relative price.)
Chapter 8
 Hicks:
 After the change in the relative price, the
typical consumer is still able to reach the
same level of satisfaction as the original
optimal consumption bundle. (Keep the
utility constant before and after the
change in the relative price.)
 Figures.
Slutsky decomposition
Hicks decomposition
希克斯分解
Y
U1
U2
E
E'
G
X
O
替代
效应
收入
效应
Chapter 8
 Warning :
 Subs. Effect is non-positive, while the sign of
the income effect isn’t unique, depending on the
type of the good.
 Can we compare the subs. Effects?
 Giffen goods must be the inferior goods, but not
vice versa.
 The law of demand.
 Some examples.
Chapter 8
Chapter 8
Chapter 8
Chapter 8
Chapter 9
 To explain the source of “income”, we impose a
def. of “endowment”, which means the initial
holding of different goods.
 Budget constraint:
 We can see the endowment is always on the
budget line, independent of the relative price.
Chapter 9
Chapter 9
 Figure: Gross demand, net demand or net
supply
 Now in the equilibrium, we should find the
optimal choice (gross demand) and make
it clear that the decision the typical
consumer makes (net demand or net
supply).
Chapter 9
 Comparative
statics:
 Income(1
and 2) figure
 Price :figure
Chapter 9
 How to obtain the price offer curve?
 Endowment point must be on the price
offer curve, and the line through w and a,
which is another point on the price offer
curve is the budget line corresponding to
a.
 The area which the price offer curve must
be in.
Chapter 9
 From personal gross demand curve to net
demand or supply curve (Def.) (figure)
 Two examples: (figures)
 Impose a quantity tax on the consumption
of good 1
 Analysis of the labor supply curve (from
the price offer curve to the labor supply
curve)
Thank you