Income Effect and Substitution Effect Power Point
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Transcript of Income Effect and Substitution Effect Power Point
![Page 1: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/1.jpg)
Substitution Effect,Income Effect
&Price Effect
![Page 2: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/2.jpg)
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.
![Page 3: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/3.jpg)
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
![Page 4: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/4.jpg)
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
![Page 5: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/5.jpg)
Substitution Effect (S.E.)
Px Qx
Px Qx
![Page 6: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/6.jpg)
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.
![Page 7: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/7.jpg)
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
![Page 8: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/8.jpg)
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
![Page 9: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/9.jpg)
Income Effect (I.E.)
I Qx
I Qx
Normal Goods !!
![Page 10: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/10.jpg)
Income Effect (I.E.)
I Qx
I Qx
Normal Goods !!
![Page 11: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/11.jpg)
Income Effect (I.E.)
Normal GoodInferior Good
Qy
Qx0
Qx0 Qx1
QxIQy
Qx0
Qx0Qx1
QxI
![Page 12: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/12.jpg)
Income Effect (I.E.)
Normal GoodInferior Good
Qy
Qx0
Qx1 Qx0
QxIQy
Qx0
Qx1Qx0
QxI
![Page 13: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/13.jpg)
Income Effect (I.E.)
• Normal Good:
• Inferior Good: I
Qx
I
I
I
Qx
Qx
Qx
![Page 14: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/14.jpg)
Price Effect (P.E.)• Definition: It refers to the change in quantity demanded
for a good caused by a change in relative price.
![Page 15: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/15.jpg)
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
![Page 16: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/16.jpg)
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
![Page 17: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/17.jpg)
When price changes(P.E.)
P.E. = S.E. + I.E.
Relative price changes(S.E.)
Real income changes(I.E.)
![Page 18: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/18.jpg)
When price changes(P.E.)
P.E. = S.E. + I.E.
Relative price changes(S.E.)
Real income changes(I.E.)
![Page 19: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/19.jpg)
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
![Page 20: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/20.jpg)
P.E.Assume Px
↓
S.E. : Px ↓ Qx ↑
I.E.
normal gd :+ve
inferior gd :-ve
I ↑ Qx ↑
I ↑ Qx ↓
Qx ↑Case 1
![Page 21: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/21.jpg)
P.E. Px ↓
S.E. : Px ↓ Qx ↑
I.E.
normal gd :+ve
inferior gd :-ve
I ↑ Qx ↑
I ↑ Qx ↓
Qx ?
![Page 22: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/22.jpg)
S.E.Px ↓ Qx ↑
I.E.inferior gdI ↑ Qx ↓
S.E. I.E.
S.E. I.E.
Qx ↑
Qx ↓
Case 2
Case 3
![Page 23: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/23.jpg)
-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
![Page 24: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/24.jpg)
Graphically
Px ↓
Qx ↑
Case 1 Normal good
Qy
0 QxQx0 Qx1Qx0’
S.E.-ve
I.E.+ve
Qx ↑
Qx ↑
![Page 25: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/25.jpg)
Graphically
Px ↓
Qx ↑
Case 1 Normal good
Qy
0 QxQx0 Qx1Qx0’
S.E.-ve
I.E.+ve
Qx ↑
Qx ↑
![Page 26: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/26.jpg)
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 ↑
![Page 27: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/27.jpg)
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 ↑
![Page 28: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/28.jpg)
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 ↓
![Page 29: Income Effect and Substitution Effect Power Point](https://reader033.fdocuments.in/reader033/viewer/2022061113/545d1a55b1af9fd7708b46a8/html5/thumbnails/29.jpg)
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 ↓