5 Comparative Statics and Demand Free Online FlashCards

What does comparative statics examine?

Comparative statics examines how an optimal choice changes when one condition, such as income or a price, changes while other conditions are held fixed.

How does an income change affect the budget line?

With prices unchanged, an income increase shifts the budget line outward in parallel; an income decrease shifts it inward.

What condition holds at an interior consumer optimum?

At an interior optimum, the marginal rate of substitution equals the price ratio: $\mathrm{MRS}_{12}=\frac{p_1}{p_2}$.

What makes a good normal?

A good is normal if its demand rises when income rises, holding prices fixed.

How does a change in one price alter the budget line?

Changing one price changes the budget line's slope, rotating it around the intercept for the other good.

What does Marshallian demand represent?

Marshallian demand gives the quantity chosen at given prices and income, written $x_i(p,m)$.

What is the substitution effect of a price change?

The substitution effect is the change in choice caused by a change in relative prices. For an own-price increase, its effect on demand for that good is nonpositive.

What does Slutsky compensation preserve?

Slutsky compensation adjusts income after a price change just enough to keep the original bundle affordable. It does not necessarily preserve the original utility.

What does the Slutsky equation decompose?

The Slutsky equation is $\frac{\partial x_i(p,m)}{\partial p_j}=\frac{\partial h_i(p,u)}{\partial p_j}-x_j(p,m)\frac{\partial x_i(p,m)}{\partial m}$. It separates compensated substitution from the income-effect adjustment.

What makes a good inferior?

A good is inferior if its demand falls when income rises, holding prices fixed.

What does an Engel curve show?

An Engel curve describes the relationship between income and the chosen quantity of a good, holding prices fixed.

What traces an individual's demand curve for a good?

Varying a good's own price while holding income, other prices, and preferences fixed traces its individual demand curve. A change in its own price moves choice along that curve.