Chapter 4, Problem 1RQ

(a)

To determine

The difference between the price consumption curve and the demand curve.

Explanation of Solution

The price consumption curve is a graphical representation, which depicts the changes in the consumption of two goods due to the changes in the price of one of the goods. The price consumption curve depicts the quantities of two commodities which an individual consumer will consume when the price of one of the goods changes. On the other hand, the demand curve is a graph, which shows the changes in the consumption of one good relative to its changes in the price. The horizontal axis of the price consumption curve measures the quantity of one good and the vertical axis measures the quantity of the other good. The horizontal axis of the demand curve measures the quantity of goods and the vertical axis measures the price.

Economics Concept Introduction

Price consumption curve: A price consumption curve refers to a curve which traces the combinations of two goods when the price of one good changes.

Demand curve: A demand curve is a graph which shows the quantities of a commodity that the consumers will buy at different price levels.

(b)

To determine

The difference between the individual demand curve and the market demand curve.

Explanation of Solution

An individual demand curve is a representation of the quantity demanded by an individual at different prices. On the other hand, a market demand curve is the total quantity demanded by all the individuals in the economy at different prices. The market demand curve is obtained by the horizontal summation of all the individual demand curves.

Economics Concept Introduction

Demand curve: A demand curve is a graph which shows the quantities of a commodity that the consumers will buy at different price levels.

(c)

To determine

The difference between the Engel curve and demand curve.

Explanation of Solution

The quantity of one good which will be consumed by a consumer at different levels of income is depicted by an Engel’s curve. The horizontal axis of an Engel’s curve measures the quantity of the good and the vertical axis measures the income of the consumer. However, a demand curve shows the quantity consumed by individuals at different prices instead of different income levels. Thus, the horizontal axis of a demand curve measures the quantity demanded and the vertical axis measures the different prices.

Economics Concept Introduction

Demand curve: A demand curve is a graph which shows the quantities of a commodity that the consumers will buy at different price levels.

(d)

To determine

The difference between the income effect and the substitution effect.

Explanation of Solution

The income effect and substitution effect are the components of the price effect. The substitution effect is the change in quantity demand of a commodity due to a change in the price, when the consumer substitutes the consumption, attaining the same consumption utility. The income effect refers to the change in the consumption of a commodity, which arises due to the change in the purchasing power of an individual, which is the result of a change in the price of the commodity.

Economics Concept Introduction

Substitution effect: The substitution effect refers to an increase in the price of goods that will induce the consumers to reduce the demand for that particular good and increase the demand for the alternative goods.

Income effect: The income effect refers to an increase in income which induces the consumer to demand more goods and services.