Inflation

Inflation is, of course, a macroeconomic topic. But the division of economics into macroeconomics and microeconomics is another example of the analytic method, and as always, the method is, first analysis, and then synthesis. Someday, we need to put microeconomics and macroeconomics back together to understand how the system as a whole works. That is still an unfinished work in progress, but there are some detailed connections between macroeconomics and microeconomics that we understand pretty well.

Here is one detail. Suppose we have a pure inflation of the price level, without any change in relative prices. That means that all prices and all incomes go up by the same proportion. For example, we could suppose that all prices and all incomes double. What would happen to the demand for a particular good or service, such as chicken wings?

The answer is: nothing. Demand would be unchanged.

Here is the reasoning.

First, the preferences would not be changed. That is, the indifference curves would not shift. Preferences are subjective, and depend only on the individual herself or himself, not on the prices and income.
Second, the budget line does depend on prices and incomes. How would it change? On the one hand, a fry would now cost 8c and a wing 80c. On the other hand, the consumer would now have $2 to spend instead of $1, since incomes as well as prices have doubled.

Thus, with two dollars the person would be able to buy either 2.5 wings or 25 fries, or some combination, just as before.
It follows that the budget line has not changed either.
Since neither the budget line nor the indifference curves has changed, the optimal spending on wings and fries has not changed either.

The picture is just the same after the increase in prices and incomes as it was before.

Figure 3 (Repeated): Optimal Spending

Exception to the Law of Demand?