ECON2201 Chapter Notes - Chapter 6: Inverse Demand Function, Homothetic Preferences, Engel Curve
Document Summary
Demand functions give us the optimal amounts of each of the goods as a function of the consumers" prices and income. Normal goods the demand for the good increases when income increases. Inferior goods when in increase in income results in a reduction in the consumption of a good. An increase in income leads to a shift of the budget line outward you can construct an income offer curve by connecting the demanded bundles as the budget line shifts outward. Luxury good when the demand for a good goes up by a greater proportion than income. Necessary good when the demand for a good goes up by a lesser proportion than income. Homothetic preferences when the consumer"s preferences only depend on the ratio of good 1 to good 2, which means if they prefer (x1, x2) to (y1, y2), they also prefer (2x1, 2x2) to (2y1, 2y2) perfect subs, comps, and cobb-douglas are all examples.
