Summary

Summary Income and Substitution Effects

19 views 0 purchase

Course
ECON1010 (ECON1010)

Institution
Trent University (TrentU )

These notes offer a detailed exploration of two key concepts in consumer theory within microeconomics: Income and Substitution Effects and Indifference Curves and Marginal Rate of Substitution. These notes are essential for students studying microeconomics, providing clear and structured explanatio...

[Show more]

Preview 1 out of 3 pages

View example

Uploaded on June 14, 2024
Number of pages 3
Written in 2023/2024
Type Summary

substitution effect
income effect
normal and inferior good
giffen goods
indifference curves
downward sloping
convex to the origin
non intersecting
higher curves represe
income and substitution effects

CA$10.92

Add to cart

Add to wishlist

100% satisfaction guarantee
Immediately available after payment
Both online and in PDF
No strings attached

Income and Substitution Effects

Income and Substitution Effects describe how changes in the price of a good
influence consumer behavior. These effects help explain why the demand curve
slopes downward for most goods.

Substitution Effect:
- The substitution effect occurs when a change in the price of a good makes it more
or less expensive relative to other goods. As the price of a good decreases, it
becomes relatively cheaper compared to substitutes, leading consumers to
purchase more of it. Conversely, if the price increases, the good becomes relatively
more expensive, and consumers will buy less of it and more of other goods. The
substitution effect always moves in the opposite direction of the price change: a
price decrease leads to an increase in quantity demanded, and a price increase
leads to a decrease in quantity demanded.

Income Effect:
- The income effect occurs because a change in the price of a good affects the
consumer's real income (purchasing power). When the price of a good decreases,
the consumer's real income effectively increases because they can buy the same
amount of the good for less money, allowing them to purchase more of other goods
as well. Conversely, a price increase effectively reduces the consumer's real
income. For normal goods, the income effect reinforces the substitution effect (a
price decrease leads to an increase in quantity demanded), but for inferior goods,
the income effect can counteract the substitution effect (a price decrease might
lead to a decrease in quantity demanded).

Normal and Inferior Goods:
- Normal Goods: For normal goods, both the income and substitution effects work in
the same direction. A decrease in price leads to an increase in quantity demanded
due to both the substitution effect (the good is cheaper relative to substitutes) and
the income effect (the consumer feels richer and buys more).
-Inferior Goods: For inferior goods, the income and substitution effects work in
opposite directions. A decrease in price still leads to an increase in quantity
demanded due to the substitution effect, but the income effect might reduce the
quantity demanded because the consumer feels richer and buys less of the inferior
good.

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller tamannaverma. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for CA$10.92. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

53340 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 14 years now

Start selling