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Demand Change as Price and Wealth Change


Definition

The demand change when price and wealth change are based on Comparative Statics


Change in demand when wealth change


Denote the change in demand when wealth change as
Note: my understanding: D: change; w: when wealth change, x(p, w): change of demand.


is the vector of each demand with respect to w, its ith element is


The set of points that are demanded, with fixed price but changing wealth, forms an income expansion path.


Change in demand when price change


Denote the change in demand when price change as the matrix, its ij entry is , and it gives the response of demand for every good to every price change.


The set of points that are demanded, with fixed wealth and one price but changing the other price, forms an offer curve.


See also


Price and wealth effects must cancel out for each good

Interpretation: when all price and wealth increases by the same scale, the demand x does not change, which means that the effect from price change and effect from wealth change cancels out.


Implication of homogeneity of degree 0 of x(p, w).
, or
, or

Where : cross price elasticity of demand of l with respect to .
Note it is different from the elasticity of demand.
: elasticity of demand with respect to w.


Explain:
From , we have:

By the definition of elasticity of demand, we have:

So


See also


Note


Example