Econ501aL7 - Income and Substitution Effects When px...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Income and Substitution E f ects When p x increases, the demand for x changes because: (1) good x is now more expensive relative to good y, and (2) the consumer’s purchasing power has gone down. Substitution E f ect —the change in demand resulting from a change in the price ratio, leaving utility unchanged. Income E f ect —the change in demand resulting from the change in purchasing power (movement from the initial indi f erence curve to the f nal indi f erence curve), leaving the price ratio unchanged. total e f ect = substitution e f ect + income e f ect
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The substitution e f ect is always negative, due to dimin- ishing MRS The income e f ect is negative for normal goods (reinforc- ing the substitution e f ect), and positive for inferior goods (counteracting the substitution e f ect) 0 0.2 0.4 0.6 0.8 1 y 0.2 0.4 0.6 0.8 1 x Income and Substitution E f ects (normal good)
Background image of page 2
When income is generated by selling resources like la- bor, income and substitution e f ects are di f erent from
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 4

Econ501aL7 - Income and Substitution Effects When px...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online