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ECONnotes6 - 03:56 INCOMEANDSUBSTITUTIONEFFECTS(Ch.5)

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03:56 INCOME AND SUBSTITUTION EFFECTS (Ch. 5) Reasons why a demand curve is downward sloping- As prices go down, good is  relatively more attractive compared others. (substitution effect). As prices go  down, real disposal income goes up so quantity demanded goes up if it is normal  but goes down if its inferior. (income effect) (1) As price goes down, shift budget constraint pivotal outward (causing  indifference curve to change from U1 to U2). The difference in the quantity  demanded is the total effect.  (2) The point along U1 and new budget constraint is Xsub (same slope as new  budget constraint but hypathetical inward to intersect with U1, which shows an  increase an in Qd due to the substitution effect. (same U1 because you are  keeping total utility constant i.e. Ceteris Paribus assumption) (3) The intersection of the new indifference curve U2 with the new budget 
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This note was uploaded on 03/02/2011 for the course ECON 3010 taught by Professor Reynolds during the Spring '09 term at UVA.

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ECONnotes6 - 03:56 INCOMEANDSUBSTITUTIONEFFECTS(Ch.5)

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