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lecture06 - Changes in Price Complements Substitution and...

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Changes in Price: Complements, Substitution and Income Effects Key Issues Substitutes and Complements Cross-Price Elasticity Implications for Price Consumption Curve Income and Substitution Effects
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Substitutes & Complements Two goods are considered complements if an increase (decrease) in the price of one leads to a decrease (increase) in the quantity demanded of the other (Ex: gasoline and motor oil) If two goods are independent, then a change in the price of one good has no effect on the quantity demanded of the other (Ex: price of chicken and price of airplane tickets) Two goods are considered substitutes if an increase (decrease) in the price of one leads to an increase (decrease) in the quantity demanded of the other (Ex: movie tickets and video rentals)
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Substitutes & Complements If the price consumption curve is downward-sloping, the two goods are considered substitutes If the price consumption curve is upward- sloping, the two goods are considered complements They could be both
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