Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 9: Possibilities, preferences and choices ((Substitution Effect…
Chapter 9: Possibilities, preferences and choices
-
-
Best/Optimal Affordable Choice: The consumer’s best affordable choice is On the budget line, On the highest attainable indifference curve, Has a marginal rate of substitution between the two goods equal to the relative price of the two goods.
A Change in Price: The effect of a change in the price of a good on the quantity of the good consumed is called the price effect.
A Change in Income: The effect of a change in income on the quantity of a good consumed is called the income effect
-
For a normal good, a fall in price always increases the quantity consumed.
We can prove this assertion by dividing the price effect in two parts: Substitution effect and Income effect
The substitution effect is the effect of a change in price on the quantity bought when the consumer remains on the same indifferent curve.
Income Effect To isolate the income effect, we reverse the hypothetical pay cut and restore Lisa’s income to its original level (its actual level).
-
For an inferior good, when income increases, the quantity bought decreases.
-
So long as the substitution effect dominates, the demand curve still slopes downward.