Effects of a Price Change Consumer's budget is Sy Lower price for commodity 1 y pivots the constraint outwards p2 Now only Sy'are needed to buy the y original bundle at the new prices, p2 as if the consumers income has increased by Sy -y
Effects of a Price Change x1 Lower price for commodity 1 pivots the constraint outwards. Consumer’s budget is $y. x2 y p2 y p ' 2 Now only $y’ are needed to buy the original bundle at the new prices, as if the consumer’s income has increased by $y - $y’
Effects of a Price Change Changes to quantities demanded due to this ' extra' income are the income effect of the price change
Effects of a Price Change Changes to quantities demanded due to this ‘extra’ income are the income effect of the price change
Effects of a Price Change Slutsky discovered that changes to demand from a price change are always the sum of a pure substitution effect and an income effect
Effects of a Price Change Slutsky discovered that changes to demand from a price change are always the sum of a pure substitution effect and an income effect
Real Income Changes Slutsky asserted that if, at the new prices, less income is needed to buy the original bundle then " real income is increased more income is needed to buy the original bundle then "real income is decreased
Real Income Changes Slutsky asserted that if, at the new prices, – less income is needed to buy the original bundle then “real income” is increased –more income is needed to buy the original bundle then “real income” is decreased
Real Income Changes Original budget constraint and choice
Real Income Changes x1 x2 Original budget constraint and choice