4.2 Income and Substitution Effects The effect of a price change on the quantity demanded of a good can be broken into two parts: a substitution effect,in which satisfaction remains constant while price changes an income effect,in which the price remains constant while satisfaction changes
4.2 Income and Substitution Effects ❑ The effect of a price change on the quantity demanded of a good can be broken into two parts: ✓ a substitution effect, in which satisfaction remains constant while price changes ✓ an income effect, in which the price remains constant while satisfaction changes
Clothing (units per R month) 、乘缘票带新漏我养。人 B 02 y Budget Line 0 -Food T (units per month) Substitution Income Effect Effect Income and Substitution Effects:Normal Good
Clothing (units per month) Food (units per month) Income and Substitution Effects: Normal Good Budget Line U1 U2 C2 B A D F1 E S C1 F2 T Substitution Effect Income Effect R O
A decrease in the price of food has an income effect and a substitution effect. The consumer is initially at A on budget line RS.When the price of food falls,consumption increases by F F2 as the consumer moves to B
A decrease in the price of food has an income effect and a substitution effect. The consumer is initially at A on budget line RS. When the price of food falls, consumption increases by F1F2 as the consumer moves to B
The substitution effect F E(associated with a move from A to D) change the relative prices of food and clothing but keeps real Income (satisfaction)constant. The income effect EFz(associated with a move from D to B)keeps relative prices constant but increases purchasing power. Food is a normal good because the income effect EF2 is positive
The substitution effect F1E (associated with a move from A to D) change the relative prices of food and clothing but keeps real Income (satisfaction) constant. The income effect EF2 (associated with a move from D to B) keeps relative prices constant but increases purchasing power. Food is a normal good because the income effect EF2 is positive
Clothing (units per. month) R B 分-心 C2 Total Effect Budget Line 0 Food T (units per month) Substitution Income Effect Effect Income and Substitution Effects:inferior Good
Clothing (units per month) Food (units per month) Income and Substitution Effects: inferior Good Budget Line U1 U2 C2 R A B D F1 E S C1 F2 T Substitution Effect Income Effect Total Effect O