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One of the best-documented regularities in economics is that-when it affect all member of a household proportionately large, permanent differences in the real wage induce a most modest differences in the quantity of labor supplied by a household. This is tru across households, across countries, and across time. The standard explanation is that the substitution and income effects of a permanently higher real wage are of approximately the same size; that is, the motivation to give up leisure to take advantage of a higher real wage is roughly cancelled out by the extra freedom to pursue leisure afforded by the higher income that the higher real wage provides. This explanation has broad support among economists because it has the merit of accounting for a wide range of data with one restriction on the utility function. Among those economists who agree with the view that the income and substitution effects of a permanent increase in the real wage are approximately equal, there is much less agreement about whether the income and substitution effects are both large or both small. The size of the substitution effect is closely related to the elasticity of labor supply with respect to fluctuations in the real wage that are too short-lived to have substantial income effects. The size of the substitution effect is also a key factor in the magnitude of distortions induced by labor-income taxation and by other government policies that affect the margin between consumption and leisure or consumption and work. Hence, having a good estimate of the elasticity of labor supply has very broad and significant implications for understanding economic fluctuations and for assessing the effects of changes in public policy.1
ADVANCED ECONOMIC THEORY- Microeconomic Analysis, Dr. H.L. AHUJA 1
INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE
Drawing with a broad brush, one can paint the picture that macroeconomists, trying to explain substantial cyclical movements in labor hours in the face of modest cyclical movements in the real wage, see evidence that the substitution effect is large. Labor economists, looking at regressions of labor hours on fluctuations in the real wage or regressions of labor hours on the variation in the real wage over the life cycle, see evidence that the substitution effect is small. Direct evidence on the size of the substitution effect is muddied by several difficulties with the evidence. 1) It is hard to find temporary, exogenous movements in the real wage that could identify movements in labor supply; 2) Fluctuations in the shadow wage within a long-term relationship between firms and workers can look quite different from fluctuations in the observed wage in standard data series; and 3) Many workers may face constraints on their labor hours imposed by their employers, so that they are not able to respond freely to variations in the real wage. These issues affect the evidence contemplated both in the macroeconomics and labor economics literatures. In this paper we propose an alternative to directly inferring the substitution effect from the relationship between wages and labor supply. The equality of income and substitution effects implies that one can infer the size of the substitution effect from the size of the income effect. Thus, we estimate the income effect and use that estimate, together with restrictions from a theory of labor supply, to infer the substitution effect. We estimate the size of the income effect using a module designed by us in the Health and Retirement Study (HRS) which asks respondents to imagine what they would do if they won a sweepstakes that would pay them an amount equal to last year's family income every year as long as they live. We analyze this data using a structural model of household labor supply that imposes the restriction that income and substitution effects
to match the observed fact that few people work less than 20 hours per week. our structural model allows for fixed utility costs of going to work. Finally. It has several other features needed to capture important features of behavior.2 2 ibid 3 . Second. The model is based on the dynamic optimization problem of the household. This final feature is very important for the analysis of the labor supply response to the sweepstakes because many households report that they would quit work entirely rather than smoothly reducing hours. First. it integrates the decisions of married partners about consumption and labor supply.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 cancel. it allows for nonseparabilities between consumption and labor. These can account for a drop in observed consumption at retirement because working increases the marginal utility of consumption.
ceteris paribus. A decline in the price of gasoline. then a decline in the price of any product. a helpful way of thinking about the choice process. and all other prices remained unchanged? The household would face a new budget constraint. First. and its final choice of all goods and services might change. where you go. we believe. Keeping in mind that consumers face constrained choices. This explanation centers on income and substitution effects.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 CHAPTER: 2 2.1. its preferences. How might a household currently consuming many goods be likely to respond to a fall in the price of one of those goods if its income. for example. In other words.1 INCOME AND SUBSTITUTION EFFECTS Although the idea of utility is. if we assume that households confine their choices to products that improve their well-being. 2. makes the household unequivocally better off. may affect not only how much gasoline you purchase but also what kind of car you buy. ceteris paribus.1 The Income Effect Price changes affect households in two ways. there is an explanation for downward-sloping demand curves that does not rely on the concept of utility or the assumption of diminishing marginal utility. consider the probable response of a household to a decline in the price of some heavily used product. when and how much you travel. if a household 4 .
and I will have spent Rs 800 less for bus tickets than I did last year. I could fly home a fifth time this year.”3 2. Suppose further that last year a round-trip ticket to Jorhat cost Rs 400. I can now travel home exactly the same number of times. That is. Now that I am better off. When the price of something we buy rises. it becomes more attractive relative to potential substitutes.Microeconomic Analysis. Assuming that the price remains at Rs 200 all year. The change in consumption of X due to this improvement in well-being is called the income effect of a price change. that product also becomes relatively cheaper.L.1. Thus. I spend a total of Rs 1. hereafter called good X.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 continues to buy the exact same amount of every good and service after the price decrease. When the price of a product falls. AHUJA 5 .600 per year on trips to visit Mom. ―When the price of something we buy falls. increased competition among the Buses has led one bus to offer round-trip tickets to Jorhat for Rs 200. This year. Therefore. Dr. we are better off. or I could fly home the same number of times (four) and spend all the extra Rs 800 on other things. we are worse off. or on other products. A fall in the price of product X might cause a household 3 ADVANCED ECONOMIC THEORY. That extra income may be spent on the product whose price has declined. I have additional opportunities. H. Suppose that I live in Guwahati and that four times a year I fly to Jorhat to visit my mother. however. it will have income left over.2 The Substitution Effect The fact that a price decline leaves households better off is only part of the story. leaving Rs 600 (Rs 800 – Rs 200) to spend on other things.
imagine how I would be affected if two things happened to me at the same time. Second. In other words. but—assuming I flew home four times last year—I am no better off now than I was before the price of a ticket declined. we made the point that the "real" cost or price of a good is what one must sacrifice to consume it. Each trip that I take requires a sacrifice of Rs 400 worth of other goods and services. Earlier. The decrease in the price of air travel has exactly offset my decrease in income. When the price drops to Rs 200. assuming no change in the prices of other goods and services. I am now faced with new relative prices. First. A trip to Jorhat now requires a sacrifice of only Rs 200 worth of other goods and services. To see why this is so. my income is reduced by Rs800. the price of roundtrip air travel between Guwahati and Jorhat drops from Rs 400 to Rs 200. 6 . I will substitute away from other goods toward trips to see my mother. Thus. ceteris paribus—that is. the opportunity cost of a ticket has dropped by Rs 200. This shift is called the substitution effect of a price change. I am still likely to take more trips home because the opportunity cost of a trip home is now lower. consider again the choice that I face when a round-trip ticket to Jorhat costs Rs 400.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 to shift its purchasing pattern away from substitutes toward X. To clarify the distinction between the income and substitution effects in your mind. This opportunity cost is determined by relative prices. after the price decline. I have to sacrifice only Rs 200 (instead of Rs 400) worth of other goods and services to visit Mom. not the Rs 400 worth that it did before.
When the price of something rises. If income and other prices do not change.4 4 ibid 7 . ceteris paribus. A price increase makes households worse off. ceteris paribus. downward-sloping demand. that item becomes more expensive relative to potential substitutes. we are worse off. When the price of something falls. In addition. What do the income and substitution effects tell us about the demand curve? Both the income and substitution effects imply a negative relationship between price and quantity demanded—in other words." and we are likely to buy less of it and more of other goods (substitution effect). This is the substitution effect. Because lower price also means "less expensive relative to substitutes. spending the same amount of money buys less. we are better off." we are likely to buy more of the good (substitution effect). when the price of a product rises. and households will be forced to buy less.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 Everything works in the opposite direction when a price rises. and we will buy less of it (income effect). Higher price also means "more expensive relative to substitutes. and we are likely to buy more of that good and other goods (income effect). and the household is likely to substitute other goods for it. This is the income effect.
and lower prices lead to a higher quantity demanded. the income and substitution effects work in the same direction. Higher prices lead to a lower quantity demanded.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 Figure 1 summarizes the income and substitution effects of a price change. Figure 1 Income and Substitution Effects of a Price Change For normal goods. 8 .
made several times already.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 CHAPTER: 3 3. A simple market demand curve such as the one in Figure 5. Revealed Preference.50 or more will buy it.1 CONSUMER SURPLUS The argument. consumers will purchase 7 million hamburgers per month. At the current market price of $2. and Consumer Surplus 9 . Anyone who does not value it that highly will not.8 Market Demand. Anyone who values a hamburger at $2. If you are free to choose within the constraints imposed by prices and your income. Figure 5. and the demand curve tells us how many hamburgers households would buy if they could purchase all they wanted at the posted price of $2. There is only one price in the market.50.50 to you. and it bears repeating at least once more here. that the market forces us to reveal a great deal about our personal preferences is an extremely important one.50.50. and you decide to buy (say) a hamburger for $2.8(a) illustrates this point quite clearly. you have "revealed" that a hamburger is worth at least $2.
Similarly. consumers would still buy 1 million hamburgers. consumer surplus is a bit lower than it is at points A and B. $2. The consumer surplus earned by the people willing to pay $5. If these people were able to buy the good at a price of $2. The total value of the consumer surplus suggested by the data in Figure 5.8(a) are valued at more than the market price as well. for the third million hamburgers.8(a) is roughly equal to the area of the shaded triangle in Figure 5.8(a) is represented by the shaded area in Figure 5. If the good were actually sold for 10 . value hamburgers at more than $2. think about offering hamburgers to consumers at successively lower prices. The second million hamburgers in Figure 5.00 for a hamburger is approximately equal to the shaded area between point A and the price.50.50. although the consumer surplus gained is slightly less.50. Point B on the market demand curve shows the maximum amount that consumers would be willing to pay for the second million hamburgers.8(b). however.00.8(b) Some people. they would earn a consumer surplus.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 The difference between the maximum amount that a person is willing to pay for a good and its current market price is the person's consumer surplus. The total consumer surplus suggested by the data in Figure 5. The consumer surplus earned by these people is equal to the shaded area between B and the price. $2.50. but it is still significant.8(a) shows. As Figure 5. maximum willingness to pay is given by point C. Consumer surplus is the difference between the maximum amount a person is willing to pay for a good and its current market price. even if the price were $5. To understand why this is so.
A diamond. those near point A on the demand curve would get a large surplus. The low price of water owes much to the fact that it is in plentiful supply. The idea of consumer surplus helps to explain an old paradox that dates back to Plato. and on the contrary. but imagine what would happen to its price if there were simply not enough for everyone. consumer surplus is the entire area under the demand curve.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 $2. those at point B would get a smaller surplus. It would command a high price indeed. Nothing is more useful than water: but it will purchase scarce any thing. Smith's diamond/water paradox is still instructive. Even at a price of zero we do not consume an infinite amount of water.. has scarce any value in use. at least where water is concerned. We consume up to the point where marginal utility drops to zero. on the contrary. those which have the greatest value in exchange have frequently little or no value in use. We tend to take water for granted. but a very great quantity of other goods may frequently be had in exchange for it. Consumer surplus measurement is a key element in cost-benefit analysis. To decide whether to build 11 . Although diamonds have arguably more than "scarce any value in use" today (e. they are used to cut glass).50. Each of us enjoys an enormous consumer surplus when we consume nearly free water. the formal technique by which the benefits of a public project are weighed against its costs. scarce anything can be had in exchange for it. Those at point E would get none. At a price of zero.g. Adam Smith wrote about it in 1776: The things which have the greatest value in use have frequently little or no value in exchange. The marginal value of water is zero.
or given. Just as the value of water to consumers is not just its price times the quantity that people consume.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 a new electrical power plant. that income is in fact partially determined by choices that households make in input markets (look back at Figure 5. we assumed that income was fixed. The total value that should be weighed against the costs of the plant includes the consumer surplus that electricity users will enjoy if the plant is built. 3. we have focused on the decision-making process that lies behind output demand curves. we need to know the value. How much to work 12 . Households with limited incomes allocate those incomes across various combinations of goods and services that are available and affordable. Whether to work 2. however. to consumers. households face constrained choices in input markets. We noted at the outset. Household members supply labor in exchange for wages or salaries. of the electricity that it will produce. the value of electricity generated is not just the price of electricity times the quantity the new plant will produce. 3. In looking at the factors affecting choices in the output market.3 THE LABOUR SUPPLY DECISION Most income in the United States is wage and salary income paid in compensation for labor.2 HOUSEHOLD CHOISE IN INPUT MARKETS So far. They must decide: 1. We now turn to a brief discussion of the two decisions households make in input markets: the labor supply decision and the saving decision.1). As in output markets.
In general. but not for a money wage.9. the trade-off is between the value of the goods and services I can buy with the wages I earn versus the value of things I can produce at home—home-grown food. In this case. household members must decide how much labor to supply. The choices they make are affected by: 1. and (b) unpaid work. or sleeping.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 3. bringing up my children. If I do not work. Another option is to work. There are basically two alternatives to working for a wage: (a) not working. clean clothes. swimming. my final choice depends on how I value the alternatives available. watching TV. or taking care of my house. Thus. I earn a wage that I can use to buy things. What kind of a job to work at In essence. Availability of jobs 2. This choice is illustrated in Figure 5. and so on—or the value I place on leisure. I sacrifice money income for the benefits of growing my own food. If I work. the labor supply decision involves a set of trade-offs. Market wage rates 3. then: The 13 . I sacrifice income for the benefits of staying at home and reading. As with the trade-offs in output markets. manageable children. Skills they possess As with decisions in output markets.
and leisure and the value of nonmarket production on the other. 14 . Figure 5.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 wage rate can be thought of as the price—or the opportunity cost—of the benefits of either unpaid work or leisure.9 The Trade-Off Facing Households The decision to enter the workforce involves a trade-off between wages (and the goods and services that wages will buy) on the one hand.
I give up one hour's wages. First.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 CHAPTER: 4 4. means reallocating time between work and nonwork activities. 4. Trading off one good for another involves buying less of one and more of another. The final choice within these constraints depends on the unique tastes and preferences of each household.2 INCOME AND SUBSTITUTION EFFECTS OF A WAGE CHANGE A labor supply curve shows the quantity of labor supplied at different wage rates. we do so with one important distinction. Now they must choose among goods. Thus the wage rate is the price of leisure.1 THE PRICE OF LEISURE In our analysis in the early part of this chapter. For each hour of leisure that I decide to consume. The availability of jobs and these job wage rates determine the final combinations of goods and services that a household can afford. services. so households simply reallocate money from one good to the other. however. Conditions in the labor market determine the budget constraints and final opportunity sets that face households. households had to allocate a limited budget across a set of goods and services. If they work the same number of hours—that is. Different people place more or less value on leisure—but everyone needs to put food on the table. When we add leisure to the picture. The shape of the labor supply curve depends on how households react to changes in the wage rate. and leisure. an increase in wages makes households better off. "Buying" more leisure. Consider an increase in wages. if they supply the same amount of labor—they will earn 15 .
and labor supply will decrease. there is also a potential substitution effect of a wage increase.10(a). a good for which demand increases as income increases. However. The income effect of a wage increase implies buying more leisure and working less. 16 . like the one in Figure 5. If the substitution effect is greater than the income effect. They can also buy more leisure. a higher wage will lead to added consumption of leisure. the wage increase will increase labor supply. Whether households will supply more labor overall or less labor overall when wages rise depends on the relative strength of both the income and the substitution effects. we would expect households to substitute other goods for leisure." as the one in Figure 5. This implies that the labor supply curve "bends back. however. If the income effect outweighs the substitution effect. If you think of the wage rate as the price of leisure. or a lower quantity demanded of leisure and a higher quantity supplied of labor. A higher wage rate means that leisure is more expensive. an increase in income will lead to a higher demand for leisure and a lower labor supply. the substitution effect implies buying less leisure and working more. This means working more. or has a positive slope. Note that in the labor market the income and substitution effects work in opposite directions when leisure is a normal good. As a result. each individual hour of leisure consumed at a higher wage costs more in forgone wages. This suggests that the labor supply curve slopes upward.10(b) does. This is the income effect of a wage increase.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 higher incomes and be able to buy more goods and services. If leisure is a normal good—that is.
Spinning and weaving were done in small cottages to supplement the family farm income. in this figure. the labor supply curve slopes upward (a).10 Two Labor Supply Curves Here. When the income effect outweighs the substitution effect. the empirical evidence suggests a backward-bending labor supply curve.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 Figure 5. the result is a "backward-bending" labor supply curve: The labor supply curve slopes downward (b). when the substitution effect outweighs the income effect. Some economic historians claim that this higher income actually led many households to take more leisure and work fewer hours." During that period. wages and household incomes rose considerably. 17 . During the early years of the Industrial Revolution in late eighteenth-century Great Britain. the textile industry operated under what was called the "putting-out" system. hence the term "cottage industry.
when you sell stock to put a deposit on a house. we have talked about only the current period—the allocation of current income among alternative uses and the work/leisure choice today. the line between input and output market decisions becomes blurred. Most people cannot finance large purchases —a house 18 . however. when you retire and begin to receive money from your pension plan. 4. The point here is simple: When leisure is added to the choice set. We then pointed out that.3 SAVING & BORROWING: PRESENT Vs. Households can also. or in 45 years. households decide whether to work and how much to work.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 Just as income and substitution effects helped us understand household choices in output markets. they now help us understand household choices in input markets. Within the constraints imposed by the market. So far. households decide simultaneously how much of each good to consume and how much leisure to consume. when you use your savings to buy a car. (1) use present income to finance future spending—they can save—or (2) use future income to finance present spending—they can borrow. at least in part. in 10 years. When a household decides to save. That future consumption may come in 3 years. In fact. it is using current income to finance future consumption. choices made by households determine income levels. FUTURE CONSUMPTION We began this chapter by examining the way households allocate a fixed income over a large number of goods and services.
When you put your money in any of these places. each dollar that I spend today (instead of saving) costs me more in terms of future consumption 19 . financing a current purchase with future income. that I have been saving for a number of years for retirement. the annual interest rises to $100.000 invested in a 5 percent savings account or bond yields $50 per year. it usually puts the money into something that will generate income. and so forth—many of which are virtually risk free. That is. so do changes in interest rates affect household behavior in capital markets. you are actually lending it out. First. When a household borrows. stocks. They almost always borrow money and sign a mortgage. for example—out of current income and savings. money market funds. When a household saves. If rates rise to 10 percent. Just as changes in wage rates affect household behavior in the labor market. for example. in essence. because each dollar saved will earn a higher rate of return. It pays back the loan out of future income. This fee usually takes the form of interest. it is.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 or condominium. Higher interest rates also mean that saving will earn a higher return: $1. Suppose. Will an increase in interest rates lead to an increase or a decrease in my saving? The answer is not obvious. corporate bonds. and the borrower pays you a fee for its use. the "price" of spending today in terms of forgone future spending is higher. There is no sense in putting money under your mattress when you can make it work in so many ways: savings accounts. the effect of changes in interest rates on saving can best be understood in terms of income and substitution effects. Higher interest rates mean that borrowing is more expensive—required monthly payments on a newly purchased house or car will be higher. What impact do interest rates have on saving behavior? As with the effect of wage changes on labor supply.
it is almost as if households have supplied the capital for the fee we call interest. in which the suppliers of capital (households that save) and the demand for capital (business firms that want to invest) interact. I will not need to save as much for retirement or future consumption as I did before. When a firm borrows to finance a capital acquisition.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 because my saving will now earn a higher return. The amount of capital investment in an economy is constrained in the long run by that economy's saving rate. and this is the substitution effect at work. the financial capital market. On this score I will be led to save more. Higher interest rates mean that it will take less saving today to reach a specific target amount of savings tomorrow. the substitution effect is larger than the income effect. higher interest rates mean more than that. The final impact of a change in interest rates on saving depends on the relative size of the income and substitution effects. Saving and investment decisions involve a huge and complex set of institutions. 20 . Higher interest rates mean savers are better off. However. If interest were paid at a rate of 10 percent. In other words. Consequently. and this is the income effect at work. You can think of household saving as the economy's supply of capital. I may be led to save less. and so higher interest rates may lead to less saving. I would have my $200 in just 7 years. Most empirical evidence indicates that saving tends to increase as the interest rate rises. One hundred dollars put into a savings account with 5 percent compound interest will double in 14 years.
households are forced to weigh the value of leisure against the value of goods and services that can be bought with wage income. Another important explanation behind the negative relationship between price and quantity demanded lies in income effects and substitution effects. 21 . we went behind the household demand curve. Within those limits. or they can spend tomorrow's income today by borrowing.1 A REVIEW: HOUSEHOLDS AND INPUT MARKET In probing the behavior of households in both input and output markets and examining the nature of constrained choice. or constraints. Income. households make their choices on the basis of personal tastes and preferences. In the labor market. The notion of utility helps to explain the process of choice. The law of diminishing marginal utility partly explains why people seem to spread their incomes over many different goods and services and why demand curves have a negative slope.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 CHAPETR: 5 5. wealth. They can finance spending in the future with today's income by saving and earning interest. and prices set the limits. As we turned to input markets. Households also face the problem of allocating income and consumption over more than one period of time. we found household preferences for goods and leisure operating within a set of constraints imposed by the market. Once again. within which households make their choices in output markets. using the simplifying assumption that income was fixed and given. we relaxed the assumption that income was fixed and given.
The principal purpose of this paper has been to show that there is a simple way to unify the treatment of income and substitution effects in terms of ‘fanning and curvature’ of 9 indifference curves. The substitution effect is the change in consumption patterns due to a change in the relative prices of goods. if not cold. Unfortunately. 22 . and a result that should be more widely known by students of economics.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 CONCLUSION At some point in almost every course in Microeconomics there is a treatment of the effect on a consumer’s demand of a change in commodity prices. and even categories of goods. Examples would be the relative price of Pepsi vs. goods. often leaves students a little bewildered. For example. In the process of making this demonstration we also attempted to make accessible the Milleron-Mitiushin-Polterovich theorem as it is one of the more interesting advanced results in modern consumer theory. if private universities increase their tuition by 10% and public universities increase their tuition by only 2%. this beautiful and important piece of analysis. Red Meat vs. generally summarized as ‘income and substitution effect analysis’. The same can be said across brands. Coke. then it is very likely that we would see a shift in attendance from private to public universities (at least amongst students accepted to both). The paper will have achieved its objectives if income and substitution effect analysis ceases to be the burden it sometimes is for students and becomes instead an enlivening entree into a deeper investigation of consumer behaviour. Entertainment. Poultry and Clothes vs.
This can occur from income increases. price decreases increase one’s purchasing power. price changes. 23 . Since income is not a good in and of itself (it can only be exchanged for goods and services. For example.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 The income effect is the change in consumption patterns due to the change in purchasing power. Also. or even currency fluctuations. For example. thus increasing your utility. a point which has been debated recently by neuroeconomists). These categorizations relate consumption of a good with a particular individual’s income. Normal goods increase in consumption as income increase while inferior goods decrease as income increases. a decrease in the price of all cars allows you to buy either a cheaper car or a better car for the same price. some goods can be normal or inferior only on certain ranges of an income spectrum. demand for education increases. Goods typically fall into one of two categories: normal and inferior. education is a normal good: as one’s income increases (family income).
Dickens. HOW WAGES CHANGE. http://en. 2006. visited on 5 February. 2. 5.org/glossary/substitute. H. 2012.org/wiki/Substitute_good#Examples.INCOME AND SUBSTITUTION EFFECT OF A WAGE CHANGE 2012 BIBLIOGRAPHY 1. William T. ADVANCED ECONOMIC THEORY. INDIAN ECONOMICE:PERFORMANCES AND POLICIES.Microeconomic Analysis. Dr. 2012. http://www.economicswebinstitute. SUBSTITUTION EFFECT. AHUJA. 24 . UMA KAPILA. SEVENTEENTH EDITION 2011. visited on 6 February.L. SUBSTITUTE GOODS. 3. European Central Bank. CHAND PUBLICATIONS. 2008.wikipedia.htm. S. 4. by Valentino Piana (2005).
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