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Adding up condition
Multiplying each demand function by the corresponding
price and adding up must equal total income.
This has implications for price and income elasticities
Income elasticities, weighted by budget shares, must sum to 1.
Also restriction on the sum of price elasticities
Adding-up conditions on elasticities
Suppose there are 3 goods: u(x,y,z). Let I
denote income and let px, pz, pY denote the
prices of the goods.
sx( = xpx/I), sy( = ypy/I) and sz( = zpz/I) are the
budget shares. Note that sx+ sy+sz = 1.
The adding up conditions
Income elasticities: weighted sum adds up to 1
Approach (A)
xt = pt + yt + Ht
xt
Here, is not affected by Ht.
pt
xt
Similarly, is not affected by Ht.
yt
Approach (B)
Winter demand
xt = 1 1pt + 1yt
Summer demand
xt = 2 2pt + 2yt
xt x
In this case, 1 in the winter, but t 2 in the summer.
pt pt
xt
Similarly, with .
yt
Approach (C)
xt = [ + Ht]pt + yt + Ht = pt + yt + Ht + Htpt
xt
Here, H t is affected by Ht .
pt