Table of Income and Substitution Effects

Table of Income and Substitution Effects - it's snowing,...

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Table of Income and Substitution Effects While we cannot be absolutely certain about the net result, in general, the substitution effect is stronger than the income effect. That is, when the price of hamburgers goes up, you will most likely eat fewer hamburgers and more hot dogs, since the change in relative prices (substitution effect) affects you more than the perceived change in your income (income effect). Another factor influencing demand is one which marketers and advertisers are always trying to understand and target: buyers' preferences. What do people like? When and how do they like it? Still looking at soda, it makes sense that people drink more soda when it's hot, or when they're eating a meal, or when they've been exercising. In these cases, buyers' preferences have changed: they want the soda more, and are therefore willing to pay more for the same good. Likewise, if
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Unformatted text preview: it's snowing, fewer people will crave a cold soda, and the price they are willing to pay for a cold soda is lower, although they may be willing to pay a little extra money for a hot coffee. Normal, Inferior, and Giffen Goods Are all goods the same? Is more always better? Up to this point, we have been assuming that when we have more money, or feel like we have more money, we will tend to buy more goods. It makes sense: the more money we have, the more we buy. If we have less money, or if the price goes up, however, we tend to buy less. Because this is usually the case, we call such goods normal goods. If you buy more of a good when you have more money, that good is a normal good. If the price of a normal good increases, you buy less....
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