Substitution%20Effect,%20Income%20Effect%20

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Substitution Effect,Income EffectPrice Effect
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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.

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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.

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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.

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Substitution Effect (S.E.)
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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.

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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.

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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.

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Income Effect (I.E.)
Normal Goods !!
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Income Effect (I.E.)
Normal Goods !!
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Income Effect (I.E.)
Inferior Good
Normal Good
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Income Effect (I.E.)
Inferior Good
Normal Good
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Income Effect (I.E.)
Qx
I

• Normal Good
• Inferior Good

Qx
I
Qx
I
I
Qx
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Price Effect (P.E.)

• Definition It refers to the change in quantity
  demanded for a good caused by a change in
  relative price.

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Price Effect (P.E.)

• Definition It refers to the change in quantity
  demanded for a good caused by a change in
  relative price.

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Price Effect (P.E.)

• Definition It refers to the change in quantity
  demanded for a good caused by a change in
  relative price.

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When price changes(P.E.)
Relative price changes (S.E.)
Real income changes (I.E.)

• P.E. S.E. I.E.

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When price changes(P.E.)
Relative price changes (S.E.)
Real income changes (I.E.)

• P.E. S.E. I.E.

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P.E.
Px ? Qx ? Px ? Qx ?
S.E.
-ve
I ? Qx ? I ? Qx ?
normal gd ve
I.E.
inferior gd -ve
I ? Qx ? I ? Qx ?
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P.E.Assume Px ?
Case 1
Qx ?

S.E. Px ? Qx ?
normal gd ve
I ? Qx ?
I.E.
inferior gd -ve
I ? Qx ?
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P.E. Px ?

S.E. Px ? Qx ?
Qx ?
normal gd ve
I ? Qx ?
I.E.
inferior gd -ve
I ? Qx ?
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S.E. Px ? Qx ?
Case 2
S.E. ? I.E.
Qx ?
Case 3
I.E. inferior gd I ? Qx ?
S.E. ? I.E.
Qx ?
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Summary
Case 1 normal gd
-ve S.E. ve I.E. Qx ? Qx ?
Qx ?
Case 2 inferior gd non-giffen case
-ve S.E. ? -ve I.E. Qx ? ? Qx ?
Qx ?
Px ?
Case 3 inferior gd giffen case
-ve S.E. ? -ve I.E. Qx ? ? Qx ?
Qx ?
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Graphically
Case 1
Normal good
Qx ?
S.E. -ve
Qx ?
Px ?
Qx ?
I.E. ve
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Graphically
Case 1
Normal good
Qx ?
S.E. -ve
Qx ?
Px ?
Qx ?
I.E. ve
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Graphically
Case 2
Inferior good, non-giffen case
Qx ?
S.E. -ve
Qx ?
S.E.?I.E.
Px ?
I.E. -ve
Qx ?
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Graphically
Case 2
Inferior good, non-giffen case
Qx ?
S.E. -ve
Qx ?
S.E.?I.E.
Px ?
I.E. -ve
Qx ?
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Graphically
Case 3
Inferior good, giffen case
Qx ?
S.E. -ve
Qx ?
S.E.?I.E.
Px ?
I.E. -ve
Qx ?
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Graphically
Case 3
Inferior good, giffen case
Qx ?
S.E. -ve
Qx ?
S.E.?I.E.
Px ?
I.E. -ve
Qx ?