Book contents
- Frontmatter
- Contents
- Preface
- PART ONE INTRODUCTION
- PART TWO PREFERENCE, CONSUMPTION, AND DEMAND
- 3 Utility and Preference
- 4 Consumption and Demand
- 5 Applications and Extensions of Demand Theory
- PART THREE THE FIRM AND THE INDUSTRY
- PART FOUR FACTOR MARKETS AND INCOME DISTRIBUTION
- PART FIVE EXCHANGE
- PART SIX ECONOMICS AND TIME
- PART SEVEN POLITICAL ECONOMY
- Answers to Selected Questions
- Name Index
- Subject Index
5 - Applications and Extensions of Demand Theory
from PART TWO - PREFERENCE, CONSUMPTION, AND DEMAND
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- Preface
- PART ONE INTRODUCTION
- PART TWO PREFERENCE, CONSUMPTION, AND DEMAND
- 3 Utility and Preference
- 4 Consumption and Demand
- 5 Applications and Extensions of Demand Theory
- PART THREE THE FIRM AND THE INDUSTRY
- PART FOUR FACTOR MARKETS AND INCOME DISTRIBUTION
- PART FIVE EXCHANGE
- PART SIX ECONOMICS AND TIME
- PART SEVEN POLITICAL ECONOMY
- Answers to Selected Questions
- Name Index
- Subject Index
Summary
A tax on gasoline will raise its price. By the Law of Demand, gasoline consumption will fall. But how much? And a fall in consumer incomes will likely discourage gasoline usage, but to what extent? This chapter describes the measures that economists use to quantify how consumers respond to changes in price and changes in income. Other questions addressed include: (1) Why are consumers' demands sometimes very sensitive to changes in price or in income, sometimes not? (2) What is the effect of nonprice constraints upon choice, for example rationing in wartime?
THE ENGEL CURVE AND THE INCOME ELASTICITY OF DEMAND
For any good X, the change in consumption (Δx) due to a change in income (ΔI) could be measured by the ratio Δx/ΔI. This ratio is the slope of the Engel Curve (see Section 4.3 in the preceding chapter) over the relevant range. But there is a difficulty with the simple ratio Δx/ΔI: it is sensitive to the units of measurement. If commodity X is butter, the numerical value of Δx/ΔI varies depending on whether the amount of butter is stated in ounces or pounds or tons, and whether income is quoted in dollars or cents. The concept of elasticity eliminates this difficulty by expressing the variables in proportionate (percentage) terms.
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- Chapter
- Information
- Price Theory and ApplicationsDecisions, Markets, and Information, pp. 127 - 154Publisher: Cambridge University PressPrint publication year: 2005
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