08-IE and SE - Applying Consumer Theory: Income and...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Applying Consumer Theory: Income and Substitution Effects and Market Demand Reading: Chapter 4
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 As price of one good changes (all else the same), there are two effects: Substitution Effect Consumers will tend to buy more of the good  that has become relatively cheaper, and less  of the good that is relatively more expensive Income Effect Consumers experience an increase (decrease)  in purchasing power when the price of one  good falls (goes up)
Background image of page 2
3 Substitution Effect The substitution effect is the change in an  item’s consumption associated with a  change in the price of the item, with  the  level of utility held constant When the price of good declines, the  substitution effect always leads to an  increase in the quantity demanded of the  good
Background image of page 3

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

View Full DocumentRight Arrow Icon
4 Income Effect The income effect is the change in an item’s  consumption brought about by the change  in purchasing power, with 
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/06/2009 for the course ECON 102A taught by Professor Sorensen during the Spring '08 term at UC Riverside.

Page1 / 11

08-IE and SE - Applying Consumer Theory: Income and...

This preview shows document pages 1 - 5. Sign up to view the full document.

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