Question

If a consumer's net demands are (5,-3) and her endowment is (4,4) what are her gross demands?

Short answer

The gross demands are (9, 1).

Step-by-step solution

Understand the terms

Net demands refer to the difference between what the consumer ends up consuming and what they start with (the endowment). Gross demands are the total amount the consumer consumes without considering her endowment.

Apply the formula for gross demands

Use the formula for finding gross demands: \( \text{Gross Demands} = \text{Net Demands} + \text{Endowment} \).

Calculate gross demands for the first good

Substitute the net demand and endowment for the first good into the formula: \( 5 = \text{Gross Demand}_1 - 4 \). Solve for \( \text{Gross Demand}_1 \) to get \( \text{Gross Demand}_1 = 5 + 4 = 9 \).

Calculate gross demands for the second good

Substitute the net demand and endowment for the second good into the formula: \( -3 = \text{Gross Demand}_2 - 4 \). Solve for \( \text{Gross Demand}_2 \) to get \( \text{Gross Demand}_2 = -3 + 4 = 1 \).

Compile the gross demands

Put the calculated gross demands for both goods together. The gross demands are then \( (9, 1) \).

Key concepts

Net Demands

In microeconomics, net demands are an essential concept in understanding consumer behavior. Net demands are the quantities describing how much more (or less) of a good a consumer wishes to consume than their initial endowment. Essentially, it's the difference between what a consumer ends up with and what they originally had.
For example, if a consumer desires to consume more of a particular good than they possess, their net demand for that good is positive. Conversely, if they want to consume less, the net demand is negative. This reflects the consumer's plan to trade away some of their endowment or purchase additional goods to meet their preferences.
Understanding net demands allows economists to predict consumer choices and market behavior, providing insights into broader economic trends. It's an integral part of both basic consumer theory and advanced microeconomic analysis.

Endowment

An endowment refers to the initial allocation of goods that a consumer possesses without engaging in trade or additional purchasing. It's an important starting point for analyzing consumer choice. The concept of endowment in economics acts as a baseline for understanding how much of each good a consumer begins with.
Imagine a person with an endowment of apples and oranges. This starting quantity defines what they must carefully allocate based on their preferences and market opportunities. For instance, a consumer with an endowment of 4 apples and 4 oranges will decide whether to consume all, trade some, or purchase additional fruit based on their net demands.
Recognizing this initial allocation helps economists model how consumers make decisions, providing a clear picture of their consumption patterns and how they respond to changes in prices or market conditions.

Microeconomics

Microeconomics is a branch of economics that deals with the behaviors and decisions of individuals and firms in allocating limited resources. It focuses on the ways these smaller units operate within the economic system and interact with each other.
This field pays close attention to supply and demand dynamics, price setting, consumer choice, and the behavior of markets under different conditions, like competition or monopolies. Microeconomics investigates how these factors create incentives and influence decisions, including net demands and endowments.
By analyzing these elements, microeconomics provides valuable insights into optimizing resource use, improving production efficiency, and crafting policies that enhance economic welfare. Through the lens of microeconomics, we better understand individual market mechanisms which cumulatively affect the broader economy.