Chapter 4 Individual and Market Demand  Questions for Review 1. Explain the difference between each of the following terms: a. a price consumption curve and a demand curve The price consumption curve (PCC) shows the quantities of two goods a consumer will PURCHASE as the price of one of the goods changes, while a demand curve shows the quantity of one good a consumer will purchase as the price of that good changes. The graph of the PCC plots the quantity of one good on the horizontal axis and the quantity of the other good on the VERTICAL axis. The demand curve plots the quantity of the good on the horizontal axis and its price on the vertical axis. b. an individual demand curve and a market demand curve An individual demand curve plots the quantity demanded by one person at various prices. A market demand curve is the horizontal sum of all the individual demand curves. It plots the total quantity demanded by all consumers at various prices. c. an Engel curve and a demand curve An Engel curve shows the quantity of one good that will be purchased by a consumer at different income levels. The quantity of the good is plotted on the horizontal axis and the consumer’s income is on the vertical axis. A demand curve is like an Engel curve except that it shows the quantity purchased at different prices instead of different income levels. d. an income effect and a substitution effect Both the substitution effect and income effect occur because of a change in the price of a good. The substitution effect is the change in the quantity demanded of the good due to the price change, holding the consumer’s utility constant. The income effect is the change in the quantity demanded of the good due to the change in purchasing power brought about by the change in the good’s price. 2. Suppose that an individual allocates his or her entire budget between two goods, food and clothing. Can both goods be inferior? Explain. No, the goods cannot both be inferior; at LEAST one must be a normal good. Here’s why. If an individual consumes only food and clothing, then any increase in income must be spent on either food or clothing or both (recall, we assume there are no savings and more of any good is preferred to less, even if the good is an inferior good). If food is an inferior good, then as income increases, consumption of food falls. With constant prices, the extra income not spent on food must be spent on clothing. Therefore as income increases, more is spent on clothing, i.e., clothing is a normal good. 3. Explain WHETHER the following statements are true or false: