Topic 1
Lecture 7
Px
Deriving demand curves
The total effect of the
price change is to
move the consumer’s
choice from ‘a’ to ‘â’.
a
â
b
X
Px
a
If we plot this into the
lower diagram, what
are we plotting?
Robin Naylor, Department of
Economics, Warwick
X
1
Topic 1
Lecture 7
Px
The total effect of the
price change is to
move the consumer’s
choice from ‘a’ to ‘â’.
a
â
b
X
Px
If we plot this into the
lower diagram, what
are we plotting?
a
â
Robin Naylor, Department of
Economics, Warwick
X
2
Topic 1
Lecture 7
Px
The total effect of the
price change is to
move the consumer’s
choice from ‘a’ to ‘â’.
a
â
b
X
Px
If we plot this into the
lower diagram, what
are we plotting?
a
â
?
Robin Naylor, Department of
Economics, Warwick
X
3
Topic 1
Lecture 7
Px
The total effect of the
price change is to
move the consumer’s
choice from ‘a’ to ‘â’.
a
â
b
X
Px
If we plot this into the
lower diagram, what
are we plotting?
a
â
What can you say
about the slope of this
curve? Must it be –ve?
CMIDC
Robin Naylor, Department of
Economics, Warwick
X
4
Topic 1
Lecture 7
Px
The Substitution
Effect of the price
change is to move the
consumer’s choice
from ‘a’ to ‘b’.
a
â
b
S
X
Px
a
If we plot this into the
lower diagram, what
are we plotting?
b
S
Robin Naylor, Department of
Economics, Warwick
?
X
5
Topic 1
Lecture 7
Px
The Substitution
Effect of the price
change is to move the
consumer’s choice
from ‘a’ to ‘b’.
a
â
b
S
X
Px
a
If we plot this into the
lower diagram, what
are we plotting?
b
S
Robin Naylor, Department of
Economics, Warwick
CUDC/CRIDC
X
6
Topic 1
Lecture 7
Px
The Substitution
Effect of the price
change is to move the
consumer’s choice
from ‘a’ to ‘b’.
a
â
b
S
X
Px
a
b
S
Robin Naylor, Department of
Economics, Warwick
Must this curve have a
–ve slope?
CUDC/CRIDC
X
7
The Substitution
Effect of the price
change is to move the
consumer’s choice
from ‘a’ to ‘b’.
Topic 1
Lecture 7
Px
The Income Effect of
the price change is to
move the consumer’s
choice from ‘b’ to ‘â’.
a
â
b
S
The Substitution
Effect determines the
CRIDC.
The Substitution
Effect combined with
the Income Effect
determines the
CMIDC.
I
X
Px
a
b
S
I
Robin Naylor, Department of
Economics, Warwick
CRIDC
X
8
The Substitution
Effect of the price
change is to move the
consumer’s choice
from ‘a’ to ‘b’.
Topic 1
Lecture 7
Px
The Income Effect of
the price change is to
move the consumer’s
choice from ‘b’ to ‘â’.
a
â
b
S
The Substitution
Effect determines the
CRIDC.
The Substitution
Effect combined with
the Income Effect
determines the
CMIDC.
I
X
Px
a
b
S
â
I
Robin Naylor, Department of
Economics, Warwick
CRIDC
CMIDC
X
9
The Substitution
Effect of the price
change is to move the
consumer’s choice
from ‘a’ to ‘b’.
Topic 1
Lecture 7
Px
The Income Effect of
the price change is to
move the consumer’s
choice from ‘b’ to ‘â’.
a
â
b
S
The Substitution
Effect determines the
CRIDC.
The Substitution
Effect combined with
the Income Effect
determines the
CMIDC.
The difference
between the CRIDC
and the CMIDC is the
Income Effect.
Px
In this diagram, X is a
Normal Good.
X
I
a
b
S
Therefore, the CMIDC
is more elastic than
the CRIDC
â
I
Robin Naylor, Department of
Economics, Warwick
CRIDC
CMIDC
X
10
The Substitution
Effect of the price
change is to move the
consumer’s choice
from ‘a’ to ‘b’.
Topic 1
Lecture 7
Px
The difference
between the CRIDC
and the CMIDC is the
Income Effect.
â
The Income Effect of
the price change is to
move the consumer’s
choice from ‘b’ to ‘â’.
a
b
S
The Substitution
Effect determines the
CRIDC.
The Substitution
Effect combined with
the Income Effect
determines the
CMIDC.
Px
In this diagram, X is a
Weakly Inferior
Good.
X
I
a
Therefore, the CMIDC
is less elastic than the
CRIDC
b
â
S
I
CMIDC
Robin Naylor, Department of
Economics, Warwick
CRIDC
X
11
The Substitution
Effect of the price
change is to move the
consumer’s choice
from ‘a’ to ‘b’.
Topic 1
Lecture 7
Px
â
The Income Effect of
the price change is to
move the consumer’s
choice from ‘b’ to ‘â’.
The difference
between the CRIDC
and the CMIDC is the
Income Effect.
a
b
In this diagram, X is a
Strongly Inferior
Good.
X
I
S
The Substitution
Effect determines the
CRIDC.
The Substitution
Effect combined with
the Income Effect
determines the
CMIDC.
Px
a
â
Therefore, the CMIDC
is +vely sloped.
b
CMIDC ?
I
S
Robin Naylor, Department of
Economics, Warwick
CRIDC
X
12
The Substitution
Effect of the price
change is to move the
consumer’s choice
from ‘a’ to ‘b’.
Topic 1
Lecture 7
Px
â
The Income Effect of
the price change is to
move the consumer’s
choice from ‘b’ to ‘â’.
The difference
between the CRIDC
and the CMIDC is the
Income Effect.
a
b
In this diagram, X is a
Strongly Inferior
Good.
X
I
S
The Substitution
Effect determines the
CRIDC.
The Substitution
Effect combined with
the Income Effect
determines the
CMIDC.
Px
a
â
Therefore, the CMIDC
is +vely sloped.
b
(Giffen Good)
I
CMIDC
S
Robin Naylor, Department of
Economics, Warwick
CRIDC
X
13
Topic 1:
Lecture 7
Keep working at B&B 4th Ed., pp. 151-171
(and don’t worry about issues (especially the
mathematical material) which go beyond what you have
seen in lecture notes or seminar exercise sheets)
Robin Naylor, Department of
Economics, Warwick
14