Effects of a Price Change What happens when a commodity's price decreases? Substitution effect(替代效应):the commodity is relatively cheaper, so consumers substitute it for now relatively more expensive other commodities
Effects of a Price Change What happens when a commodity’s price decreases? –Substitution effect (替代效应): the commodity is relatively cheaper, so consumers substitute it for now relatively more expensive other commodities
Effects of a Price Change - Income effect(收入效应):the consumer's budget of Sy can purchase more than before, as if the consumers income rose, with consequent income effects on quantities demanded
Effects of a Price Change – Income effect (收入效应): the consumer’s budget of $y can purchase more than before, as if the consumer’s income rose, with consequent income effects on quantities demanded
Effects of a Price Change Consumer's budget is Sy y Original choice p2
Effects of a Price Change x2 x1 Original choice Consumer’s budget is $y. y p2
Effects of a Price Change Consumer's budget is Sy Lower price for commodity 1 y pivots the constraint outwards p2
Effects of a Price Change x1 Lower price for commodity 1 pivots the constraint outwards. Consumer’s budget is $y. x2 y p2
Effects of a Price Change Consumer's budget is Sy Lower price for commodity 1 y pivots the constraint outwards p2 Now only Sy'are needed to buy the y original bundle at the new prices, p2 as if the consumers income has increased by Sy -y
Effects of a Price Change x1 Lower price for commodity 1 pivots the constraint outwards. Consumer’s budget is $y. x2 y p2 y p ' 2 Now only $y’ are needed to buy the original bundle at the new prices, as if the consumer’s income has increased by $y - $y’
Effects of a Price Change Changes to quantities demanded due to this ' extra income are the income effect of the price change
Effects of a Price Change Changes to quantities demanded due to this ‘extra’ income are the income effect of the price change
Effects of a Price Change Slutsky discovered that changes to demand from a price change are always the sum of a pure substitution effect and an income effect
Effects of a Price Change Slutsky discovered that changes to demand from a price change are always the sum of a pure substitution effect and an income effect
Real Income Changes Slutsky asserted that if, at the new prices, less income is needed to buy the original bundle then " real income is increased more income is needed to buy the original bundle then "real income is decreased
Real Income Changes Slutsky asserted that if, at the new prices, – less income is needed to buy the original bundle then “real income” is increased –more income is needed to buy the original bundle then “real income” is decreased