lectureOutline06 - Introduction to Economics Topic 6: More...

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ECO 100Y Introduction to Economics Topic 6: More On The Indifference Model Source: Ch. 6, Appendix, LR12, 142 onwards; LR11, pg 151 onwards; LR10, pg 153 onwards. Verbiage on SE and IE in Ch. 6, LR 12, pgs 122-125; LR 11, pgs 129-134; LR10, pages 138-142. 1 Topic 6: More On Indifference Model ECO 100 W.G. Wolfson Parsing a Change In Q D X Consider a decrease in the price of coffee, a normal good The quantity demanded of coffee will rise for 2 reasons : A fall in the relative price of coffee, compared to other drinks “Coffee is cheaper; buy more coffee” An increase in the purchasing power of money income i.e., an increase in real income “Can afford to buy more goods; buy more coffee” The Indifference Model can be used to explain these two effects, formally called: The Substitution Effect (SE) The Income Effect (IE) ECO 100 W.G. Wolfson 2 Topic 6: More On Indifference Model 1 2
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SE and IE: The Definitions The SE and the IE are independent of each other: X = X SE + X IE The Substitution Effect (SE) is the change in quantity demanded as a result only of the change in relative prices, that is, while holding real income constant The Income Effect (IE) is the change in quantity demanded
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This note was uploaded on 02/21/2009 for the course ECONOMICS ECO100 taught by Professor J.l.carr during the Spring '08 term at University of Toronto- Toronto.

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lectureOutline06 - Introduction to Economics Topic 6: More...

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