Extensions of consumer theory: changing budget constraints

    Goals of section IIB
    (1) interpret U's and their behavior to see key demand concepts: responses to income and price
    (2) extend our notion of consumer welfare to situations of interrelated markets
    (3) apply the general equilibrium model to policy situations.

Focus: How does the consumer's otpimum change when income or prices change?
We'll consider income first, then price.

The income-consumption curve (ICC): Traces out how consumption of X and Y change with income, holding relative prices constant

Recall that a change in income means a parallel shift of the budget line to BLb, for example.

With more income, the consumer's utility will rise, so the consumer's new optimum could be any of the points on BLb that lie above Ua.

Suppose the consumer's new optimum is at point 'b' (up and right from 'a')
The income-consumption curve (ICC) traces out how consumption of X and Y change with income, holding relative prices constant
(available online: Income changes and the Income Consumption Curve (ICC))

? Is X normal or inferior?
? Is Y normal or inferior?

Worksheet Illustrations of worksheet examples (Java) Summary: The ICC tells you directly whether or not you have an inferior good present Note1: a negatively-sloped ICC => one of the goods is inferior Note2: At least one good must be normal Note3: Inferior does not mean a bad

Consider what happens as the price of X falls for a consumer at an initial equilibrium point "a" in the diagram here. Worksheet Worksheet geometry (Java)

A price-consumption curve (PCC) traces out the entire set of optimal consumption points as the price of X changes.

    Recall that the BL slope gives the relative price of X: |-DY/DX| = Px/Py.
    Since the Y-good here is Ig (income spent on other goods), in this case the slope tells us Px in dollars.
    The four quantities and related prices in this case allow us to trace out the consumer's demand (see worksheet)