income effect and substitution effect power point
DESCRIPTION
Microeconomics Income & Substitution Effect. Slutsky, Hicksian & Marshalian analysisTRANSCRIPT
Substitution Effect,Income Effect
&Price Effect
Substitution Effect (S.E.)• Definition: It refers to the change in quantity demanded
for a good caused by a change in relative price, holding real income constant.
Substitution Effect (S.E.)• Definition: It refers to the change in quantity demanded
for a good caused by a change in relative price, holding real income constant.
Qy
0 QxQx0 Qx1
Px
Qx
Substitution Effect (S.E.)• Definition: It refers to the change in quantity demanded
for a good caused by a change in relative price, holding real income constant.
Qy
0 QxQx1
Qx
Px
Qx0
Substitution Effect (S.E.)
Px Qx
Px Qx
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 price constant.
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 price constant.
Qy
0 Qx
Qx
I
Qx0 Qx1
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 price constant.
Qy
0 Qx
Qx
I
Qx1 Qx0
Income Effect (I.E.)
I Qx
I Qx
Normal Goods !!
Income Effect (I.E.)
I Qx
I Qx
Normal Goods !!
Income Effect (I.E.)
Normal GoodInferior Good
Qy
Qx0
Qx0 Qx1
QxIQy
Qx0
Qx0Qx1
QxI
Income Effect (I.E.)
Normal GoodInferior Good
Qy
Qx0
Qx1 Qx0
QxIQy
Qx0
Qx1Qx0
QxI
Income Effect (I.E.)
• Normal Good:
• Inferior Good: I
Qx
I
I
I
Qx
Qx
Qx
Price Effect (P.E.)• Definition: It refers to the change in quantity demanded
for a good caused by a change in relative price.
Price Effect (P.E.)• Definition: It refers to the change in quantity demanded
for a good caused by a change in relative price.
Qy
0 Qx
Px
Qx0 Qx1
Qx
Price Effect (P.E.)• Definition: It refers to the change in quantity demanded
for a good caused by a change in relative price.
Qy
0 Qx
Px
Qx1 Qx0
Qx
When price changes(P.E.)
P.E. = S.E. + I.E.
Relative price changes(S.E.)
Real income changes(I.E.)
When price changes(P.E.)
P.E. = S.E. + I.E.
Relative price changes(S.E.)
Real income changes(I.E.)
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
P.E.Assume Px
↓
S.E. : Px ↓ Qx ↑
I.E.
normal gd :+ve
inferior gd :-ve
I ↑ Qx ↑
I ↑ Qx ↓
Qx ↑Case 1
P.E. Px ↓
S.E. : Px ↓ Qx ↑
I.E.
normal gd :+ve
inferior gd :-ve
I ↑ Qx ↑
I ↑ Qx ↓
Qx ?
S.E.Px ↓ Qx ↑
I.E.inferior gdI ↑ Qx ↓
S.E. I.E.
S.E. I.E.
Qx ↑
Qx ↓
Case 2
Case 3
-ve S.E. & +ve I.E.Qx ↑ & Qx ↑
Qx ↑
Qx ↓
Case 2inferior gd
non-giffen case
Case 3inferior gdgiffen case
Px ↓ -ve S.E. -ve I.E.Qx ↑ Qx ↓
-ve S.E. -ve I.E.Qx ↑ Qx ↓
Qx ↑
Case 1normal gd
Summary
Graphically
Px ↓
Qx ↑
Case 1 Normal good
Qy
0 QxQx0 Qx1Qx0’
S.E.-ve
I.E.+ve
Qx ↑
Qx ↑
Graphically
Px ↓
Qx ↑
Case 1 Normal good
Qy
0 QxQx0 Qx1Qx0’
S.E.-ve
I.E.+ve
Qx ↑
Qx ↑
Graphically
Px ↓
Qx ↑
Case 2 Inferior good, non-giffen case
Qy
0 QxQx0 Qx1 Qx0’
S.E.-ve
I.E.-ve
Qx ↓
S.E.I.E. Qx ↑
Graphically
Px ↓
Qx ↑
Case 2 Inferior good, non-giffen case
Qy
0 QxQx0 Qx1 Qx0’
S.E.-ve
I.E.-ve
Qx ↓
S.E.I.E. Qx ↑
Graphically
Px ↓
Qx ↑
Case 3 Inferior good, giffen case
Qy
0 QxQx0Qx1 Qx0’
S.E.-ve
I.E.-ve
Qx ↓
S.E.I.E. Qx ↓
Graphically
Px ↓
Qx ↑
Case 3 Inferior good, giffen case
Qy
0 QxQx0Qx1 Qx0’
S.E.-ve
I.E.-ve
Qx ↓
S.E.I.E. Qx ↓