Int Microeconomic Analys
Int Microeconomic Analys ECN 328
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This 0 page Class Notes was uploaded by Forrest Crist on Sunday November 1, 2015. The Class Notes belongs to ECN 328 at Marshall University taught by Staff in Fall. Since its upload, it has received 18 views. For similar materials see /class/233281/ecn-328-marshall-university in Economcs at Marshall University.
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Date Created: 11/01/15
Topic 6 Topic 6 The Income and Substitution Effects 1 Substitute and Income Effect 3 Normal Good b Inferior Good Page 1 Topic 6 Substitute and Income Effect allows the decomposition of the effect of a price change on the demand for that good Decomposes dpx Substi Effect when price changes the goal is to compensate consumer by keeping him on the same U curve The change in the demand for X that is a result of the a Substitution away from X when PX or b the substitution toward consuming more X when PX l Income Effect the change in the demand for X that is a result of the change in purchasing power a PX gt loss of purchasing power gt be shifts in or b PX l gt gain in purchasing power gt be shifts out Page 2 Topic 6 Income Substitution E ect Normal Good Px l I I l Substi Ef X1 gt X15 Income Ef X15 gt Xln A gt B the portion of the demand change due to the substitution toward the lower priced X with Utility remaining constant must stay on original utility curve B gt C the portion of the demand change that is a result of the increased purchasing power with the lower priced X Page 3 Topic 6 Normal Good mPy mPx X Substi Ef X15 lt Xi A gt B Income Ef Xln lt Xls B gt C Normal Good gt Income and Substi Effect move in same direction opposite of price A Page 4 Topic 6 Substi Effect moves opposite direction of price always Income Effect depends on if good is normal or inferior Recall Normal gt 6X16m gt 0 Inferior gt 6X16m lt 0 If Normal Good th gt loss of purchasing power gt be shifts in this X PX l gt gain in purchasing power gt be shifts out this tX Income Effect moves opposite of price If Inferior Good PX t gt loss of purchasing power gt be shifts in But axam lt 0 then X Note As your purchasing power decreases gt you want more of that good PX l gt gain in purchasing power gt be shifts out But axam lt 0 then X I Note As your purchasing power increases gt you want less of that good Income Effect moves with price Page 5 Topic 6 Summary Normal Good Income and Substi Effect move in same direction opposite of price A Inferior Good Income and Substi Effect moves in opposite directions Income Substitution Effect Inferior Good PX i l l l Substi Ef X1 gt X15 A gt B Income Ef Xln lt Xls B gt C Page 6 Topic 6 Inferior Good mPy mPx X Substi Ef X15 lt Xi A gt B Income Ef X15 gt X1 B gt C Page 7