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January 18, 2005

Theory of the Consumer

We can derive the demand curve from the Two Goods - Two Prices diagram from the Theory of the Consumer.

P1180093a.jpg

The movement from A to B (above) occurs because lowering the price pivots the budget constraint.

P1180090a.jpg

The slope of the demand curve is not unambiguous. The decomposition of the budget constraint change into income and substitution effects (not shown here) can lead to a decrease in quantity when the price decreases.

P1180090b.jpg


Posted by bparke at January 18, 2005 09:23 PM

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