File Details
Income and Substitution Effects | |
File name | Income and Substitution Effects |
File Description | The Income Effect is the effect due to the change in real income. For example, when the price goes up the consumer is not able to buy as many bundles that she could purchase before. This means that in real terms she has become worse off. The effect is measured as the difference between the "intermediate" consumption" at G and the final consumption of q1 and q2 at E. The Substitution Effect is the effect due only to the relative price change, controlling for the change in real income. In order to compute it we ask what is the bundle that would make the consumer just as happy as before the price change, but if they had to make their choice faced with the new prices. To find this point we consider a budget line characterized by the new prices but with a level of income such that it is tangent to the initial indifference curve. |
Category Name | Management Studies |
Subject Name | BUSINESS ECONOMICS |
Module Name | Theory of Consumer Behaviour |
Micro Category Name | Income Effect & Substituion Effect |
Level | Masters |
File Type | |
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