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Effects ppt
- 2. 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.
- 3. 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 Px Qx 0 Qx0 Qx1 Qx
- 4. 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 Px Qx 0 Qx1 Qx0 Qx
- 6. 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.
- 7. 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 I Qx 0 Qx0 Qx1 Qx
- 8. 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 I Qx 0 Qx1 Qx0 Qx
- 9. Income Effect (I.E.) I Qx I Qx Normal Goods !!
- 10. Income Effect (I.E.) I Qx I Qx Normal Goods !!
- 11. Income Effect (I.E.) Inferior Good Normal Good Qy I Qy Qx I 0 0 Qx0 Qx1 Qx Qx1 Qx0 Qx Qx
- 12. Income Effect (I.E.) Inferior Good Normal Good Qy I Qy Qx I 0 0 Qx1 Qx0 Qx Qx0 Qx1 Qx Qx
- 13. Income Effect (I.E.) • Inferior Good: I Qx I • Normal Good: Qx I Qx I Qx
- 14. Price Effect (P.E.) • Definition: It refers to the change in quantity demanded for a good caused by a change in relative price.
- 15. Price Effect (P.E.) • Definition: It refers to the change in quantity demanded for a good caused by a change in relative price. Qy Px Qx 0 Qx0 Qx1 Qx
- 16. Price Effect (P.E.) • Definition: It refers to the change in quantity demanded for a good caused by a change in relative price. Qy Px Qx 0 Qx1 Qx0 Qx
- 17. Relative price changes (S.E.) When price changes (P.E.) Real income changes (I.E.) P.E. = S.E. + I.E.
- 18. Relative price changes (S.E.) When price changes (P.E.) Real income changes (I.E.) P.E. = S.E. + I.E.
- 19. S.E. P.E. I.E. -ve Px ↓ Px ↑ Qx ↑ Qx ↓ I↓ I↑ Qx ↓ Qx ↑ inferior gd I ↓ -ve I↑ Qx ↑ Qx ↓ normal gd +ve
- 20. Case 1 Qx ↑ S.E. : Px ↓ Qx ↑ normal gd : I ↑ Qx ↑ +ve P.E. Assume Px ↓ I.E. inferior gd : I ↑ Qx ↓ -ve
- 21. S.E. : Px ↓ Qx ↑ P.E. normal gd : I ↑ Qx ↑ +ve Px ↓ I.E. inferior gd : I ↑ Qx ↓ -ve Qx ?
- 22. S.E. Px ↓ Qx ↑ S.E. > I.E. I.E. S.E. < I.E. inferior gd I ↑ Qx ↓ Qx ↑ Qx ↓ Case 2 Case 3
- 23. Summary -ve S.E. & +ve I.E. Qx ↑ & Qx ↑ Px ↓ -ve S.E. > -ve I.E. Qx ↑ > Qx ↓ -ve S.E. < -ve I.E. Qx ↑ < Qx ↓ Case 1 Qx ↑ normal gd Case 2 Qx ↑ inferior gd non-giffen case Qx ↓ Case 3 inferior gd giffen case
- 24. Graphically Case 1 Normal good Qy S.E. Qx ↑ -ve Px ↓ I.E. Qx ↑ +ve 0 Qx0 Qx0’ Qx1 Qx Qx ↑
- 25. Graphically Case 1 Normal good Qy S.E. Qx ↑ -ve Px ↓ I.E. Qx ↑ +ve 0 Qx0 Qx0’ Qx1 Qx Qx ↑
- 26. Graphically Case 2 Inferior good, non-giffen case Qy S.E. Qx ↑ Px ↓ -ve S.E.>I.E. I.E. Qx ↓ -ve 0 Qx0 Qx1 Qx0’ Qx Qx ↑
- 27. Graphically Case 2 Inferior good, non-giffen case Qy S.E. Qx ↑ Px ↓ -ve S.E.>I.E. I.E. Qx ↓ -ve 0 Qx0 Qx1 Qx0’ Qx Qx ↑
- 28. Graphically Case 3 Inferior good, giffen case Qy S.E. Qx ↑ -ve Px ↓ S.E.<I.E. I.E. Qx ↓ -ve 0 Qx1 Qx0 Qx0’ Qx Qx ↓
- 29. Graphically Case 3 Inferior good, giffen case Qy S.E. Qx ↑ -ve Px ↓ S.E.<I.E. I.E. Qx ↓ -ve 0 Qx1 Qx0 Qx0’ Qx Qx ↓