effects ppt
TRANSCRIPT
Substitution Effect,Income Effect
&Price Effect
Substitution Effect (S.E.)• Definition: It refers to the change in quantity demanded f
or 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 f
or 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 f
or 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 f
or 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 f
or 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 f
or 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 Good
Inferior Good
Qy
Qx
0
Qx0 Qx1
QxI Qy
Qx
0
Qx0Qx1
QxI
Income Effect (I.E.) Normal Good
Inferior Good
Qy
Qx
0
Qx1 Qx0
QxI Qy
Qx
0
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 f
or a good caused by a change in relative price.
Price Effect (P.E.)• Definition: It refers to the change in quantity demanded f
or 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 f
or 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