Explain what is meant by income and substitution effects of a price change and discuss why these might be different for different type of goods.
Date Submitted: 09/10/2006 05:14:56
Category: / History / European History
Length: 1 pages (326 words)
Category: / History / European History
Length: 1 pages (326 words)
There are two types of good- normal good and inferior good that will be discussed. A normal good is affected by income positively. That means as income increased quantity decreases. Note that when it says income, income goes up, it means the real income or the purchasing power of the consumer. An inferior good, however, a good that may in the consumer eyes be the sign of cheapness, inferior quality, consumers will buy less of …
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…less, now that price of a product decrease, consumers can now buy more of it and subsequently will demand less of the substitute. Rationality also plays a major role here, consumers will choose the product with less price. For inferior product as price decreases quantity decreases. Anyway substitute product are products that to the consumer are the same and thus will regularly replace one with the other.
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