16 Chapter Highlights
Chapter 6
Demand
This is a very important chapter, since it unifies all the material in the
previous chapter. It is also the chapter that separates the sheep from the goats.
If the student has been paying attention for the previous 5 chapters and has been
religiously doing the homework, then it is fairly easy to handle this chapter. Alas,
I have often found that students have developed a false sense of confidence after
seeing budget constraints, drift through the discussions of preference and utility,
and come crashing down to earth at Chapter 6.
So, the first thing to do is to get them to review the previous chapters.
Emphasize how each chapter builds on the previous chapters, and how Chapter 6
represents a culmination of this building. In turn Chapter 6 is a foundation for
further analysis, and must be mastered in order to continue.
Part of the problem is that there is a large number of new concepts in this
chapter: offer curves, demand curves, Engel curves, inferior goods, Giffen goods,
etc. A list of these ideas along with their definitions and page references is often
helpful just for getting the concepts down pat.
If you are doing a calculus-based course, the material in the appendix on
quasilinear preferences is quite important. We will refer to this treatment later
on when we discuss consumer’s surplus, so it is a good idea to go through it
carefully now.
Students usually have a rough time with the workbook problems. In part, I
think that this is due to the fact that we have now got a critical mass of ideas,
and that it has to percolate a bit before they can start brewing some new ideas.
A few words of encouragement help a lot here, as well as drawing links with the
earlier chapters. Most students will go back on their own and see what they
missed on first reading, if you indicate that is a good thing to do. Remember:
the point of the workbook problems is to show the students what they don’t
understand, not to give them a pat on the back. The role of the professor is to
give them a pat on the back, or a nudge in the behind, whichever seems more
appropriate.
Demand
A. Demand functions — relate prices and income to choices
Chapter 6 17
B. How do choices change as economic environment changes?
1. changes in income
a) this is a parallel shift out of the budget line
b) increase in income increases demand — normal good. Figure 6.1.
2. changes in price
a) this is a tilt or pivot of the budget line
b) decrease in price increases demand — ordinary good. Figure 6.9.
C. Examples
1. perfect substitutes. Figure 6.12.
2. perfect complements. Figure 6.13.
3. discrete good. Figure 6.14.
a) reservation price — price where consumer is just indifferent between
consuming next unit of good and not consuming it
b) u(0,m)=u(1,m−r1)
D. Substitutes and complements
1. increase in p2increases demand for x1— substitutes
E. Inverse demand curve
1. usually think of demand curve as measuring quantity as a function of price
— but can also think of price as a function of quantity