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DESCRIPTION
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Substitution Effect,
Income Effect&
Price Effect
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Substitution Effect (S.E.)
• Definition: It refers to the change in quantity demandedfor a good caused by a change in relative rice, holding
real income constant.
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Substitution Effect (S.E.)
• Definition: It refers to the change in quantity demanded for a good caused by a change in relative rice, holding
real income constant.
!y
" !#!#" !#$
P#
!#
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Substitution Effect (S.E.)
• Definition: It refers to the change in quantity demanded for a good caused by a change in relative rice, holding
real income constant.
!y
" !#!#$
!#
P#
!#"
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Substitution Effect (S.E.)
P# !#
P# !#
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Income Effect (I.E.)
• Definition: It refers to the change in quantity demandedfor a good caused by a change in real income, holding
relative rice constant.
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Income Effect (I.E.)
• Definition: It refers to the change in quantity demanded for a good caused by a change in real income, holding
relative rice constant.
!y
" !#
!#
I
!#" !#$
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Income Effect (I.E.)
• Definition: It refers to the change in quantity demanded for a good caused by a change in real income, holding
relative rice constant.
!y
" !#
!#
I
!#$ !#"
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Income Effect (I.E.)
I !#
I !#
%ormal oods ''
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Income Effect (I.E.)
I !#
I !#
%ormal oods ''
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Income Effect (I.E.)
Normal Good Inferior Good
!y
!# "
!#" !#$
QxI!y
!# "
!#"!#$
QxI
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Income Effect (I.E.)
Normal Good Inferior Good
!y
!# "
!#$ !#"
QxI!y
!# "
!#$!#"
QxI
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Income Effect (I.E.)
• %ormal ood
• Inferior ood I
Qx
I
I
I
Qx
Qx
Qx
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Price Effect (P.E.)
• Definition: It refers to the change in quantity demandedfor a good caused by a change in relative rice.
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Price Effect (P.E.)
• Definition: It refers to the change in quantity demanded for a good caused by a change in relative rice.
!y
"!#
P#
!#" !#$
!#
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Price Effect (P.E.)
• Definition: It refers to the change in quantity demanded for a good caused by a change in relative rice.
!y
"!#
P#
!#$ !#"
!#
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hen rice changes
(P.E.)
P.E. = S.E. + I.E.
*elative rice changes(S.E.)
*eal income changes
(I.E.)
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hen rice changes
(P.E.)
P.E. = S.E. + I.E.
*elative rice changes(S.E.)
*eal income changes
(I.E.)
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P.E.
S.E.
I.E.
Px↓
Qx↑
Px ↑ Qx ↓
normal gd+ve
inferior gd-ve
I↓
Qx↓
I ↑ Qx ↑
I↓
Qx↑
I ↑ Qx ↓
-ve
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P.E.
+ssume P# ↓
S.E. : P# ↓ !# ↑
I.E.
normal gd :
+ve
inferior gd :
-ve
I ↑ !# ↑
I ↑ !# ↓
Qx ↑Case 1
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P.E.
P# ↓
S.E. : P#↓
!#↑
I.E.
normal gd :
+ve
inferior gd :
-ve
I ↑ !# ↑
I ↑ !# ↓
Qx ?
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S.E.P# ↓ !# ↑
I.E.inferior gd
I ↑ !# ↓
S.E. I.E.
S.E. I.E.
Qx ↑
Qx ↓
Case
Case !
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ve S.E. & -ve I.E.!# ↑ & !# ↑
Qx ↑
Qx↓
Case
inferior gdnongiffen case
Case !inferior gd
giffen case
Px↓
ve S.E.>
ve I.E.!# ↑ > !# ↓
ve S.E. < ve I.E.!# ↑ < !# ↓
Qx↑
Case 1
normal gd
S"mmar#
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rahically
P# ↓
!# ↑
Case 1 %ormal good
!y
" !#!#" !#$!#"
S.E.ve
I.E.
-ve
!# ↑
!# ↑
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rahically
P# ↓
!# ↑
Case 1 %ormal good
!y
" !#!#" !#$!#"
S.E.ve
I.E.
-ve
!# ↑
!# ↑
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rahically
P# ↓
!# ↑
Case Inferior good, nongiffen case
!y
" !#!#" !#$ !#"
S.E.
ve
I.E.ve
!# ↓
S.E.>I.E. !# ↑
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rahically
P# ↓
!# ↑
Case Inferior good, nongiffen case
!y
" !#!#" !#$ !#"
S.E.
ve
I.E.ve
!# ↓
S.E.>I.E. !# ↑
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rahically
P# ↓
!# ↑
Case ! Inferior good, giffen case
!y
" !#!#"!#$ !#"
S.E.
ve
I.E.ve
!# ↓
S.E.<I.E. !# ↓
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rahically
P# ↓
!# ↑
Case ! Inferior good, giffen case
!y
" !#!#"!#$ !#"
S.E.
ve
I.E.ve
!# ↓
S.E.<I.E. !# ↓