A Short Course in Intermediate Microeconomics with Calculus

We will start this chapter with a detailed study of individual demand functions. Each demand function depends on three independent variables. Because of this complication it would be impossible to graph them in the obvious way. Therefore we will look at how demand changes as we vary one independent variable at a time. This exercise is called comparative statics, because we are comparing the consumer’s optimal consumption of goods 1 and 2, as one of the exogenous variables—one of the prices, or income—changes from one level to another. From now on we shall concentrate on the demand function for just one of the goods, say, good 1. In Section 2 we will focus on demand as a function of income, holding prices constant. We will derive an Engel curve, a graph which shows the desired consumption of a good as a function of income. We will distinguish between normal goods (higher income results in higher consumption) and inferior goods (higher income results in lower consumption).