Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 5] ADVANCED TOPICS IN CONSUMER DEMAND THEORY 107
where indifference curve I is tangent to budget frontier AB. The consumer reaches point C with OF characteristics from
honey and FC (equals OG in length and direction) from sugar.
Fig. 5-4
Panel B shows that one-dollar’s worth of a new good such as saccharin (with a much lower slope of calories to sweetness)
gives point H, so that the budget constraint becomes AH. The consumer is in equilibrium at point J on indifference curve II by
obtaining OK characteristics from saccharin and KJ (equals OL) from sugar, with no honey purchased. The new theory can also
be used to show price, income, and quality changes (see Problems 5.10 to 5.12).
5.6 EMPIRICAL DEMAND CURVES
An actual or empirical market demand curve for a commodity can be estimated from market data on the
quantities purchased of the commodity at various prices through time. But over time, consumers’ tastes,
income, and the price of related commodities change, causing the demand curve to shift. Similarly, changes
in technology, factor prices, and weather conditions (for agricultural commodities) cause the supply curve to
shift. Thus, the observed price-quantity relationships refer to equilibrium points on different demand and
supply curves of the commodity. If the factors affecting supply are independent of and shift much more than
the factors affecting demand and if tastes remain constant over the period of the analysis, then we can fit or
derive a demand curve from the observed price-quantity observations. If, on the other hand, the factors affecting
demand shift much more than the factors affecting supply, we get a supply curve.
EXAMPLE 6. The points in both panels of Fig. 5-5 refer to observed equilibrium points on shifting market demand and
supply curves. If supply shifts much more than demand (as for agricultural commodities), we can derive the average market
demand curve D in panel A by correcting for the factors causing the demand to shift. If demand shifts more than supply (as is
usual for industrial commodities), we can derive the average market supply curve S in panel B. Assuming that supply shifts
are much greater than demand shifts and making sure that tastes are constant, we can use regression analysis to separate the
effects of price and income changes and fit or estimate an actual market demand curve from the price-quantity observations
(see Problems 5.13 to 5.14).
Fig. 5-5