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  • Decrease in The Price of X: Quantity of Y Quantity of Y

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    Rayhan Kabir 1520290031
    14 views3 pages
    The document contains graphs that show the substitution and income effects of a decrease in the price of good X. The substitution effect causes an increase in the quantity of X consumed as consumers substitute X for the now-relatively more expensive good Y. The income effect also increases consumption of X, unless X is an inferior good in which case the income effect would slightly reduce consumption of X. A final graph illustrates both the substitution and income effects as movements along indifference curves from one price situation to another.

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    Assignment 2

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    The document contains graphs that show the substitution and income effects of a decrease in the price of good X. The substitution effect causes an increase in the quantity of X consumed as consumers substitute X for the now-relatively more expensive good Y. The income effect also increases consumption of X, unless X is an inferior good in which case the income effect would slightly reduce consumption of X. A final graph illustrates both the substitution and income effects as movements along indifference curves from one price situation to another.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    14 views3 pages

    Decrease in The Price of X: Quantity of Y Quantity of Y

    Uploaded by

    Rayhan Kabir 1520290031
    The document contains graphs that show the substitution and income effects of a decrease in the price of good X. The substitution effect causes an increase in the quantity of X consumed as consumers substitute X for the now-relatively more expensive good Y. The income effect also increases consumption of X, unless X is an inferior good in which case the income effect would slightly reduce consumption of X. A final graph illustrates both the substitution and income effects as movements along indifference curves from one price situation to another.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    Decrease in the price of X

    Quantity of Y Quantity of Y

    B1

    B B1

    B2 B

    A A I2

    S1 I1

    B2 0

    0 Quantity of X income effect Quantity of X

    Substitution effect

    Here, these two graphs show the substitution effect of a decrease in the price of X and the income effect
    of a decrease in the price of X.
    Quantity of Y Quantity of Y

    B1

    B B1

    B2 B

    A A I2

    S1 I1

    B2 0

    0 Quantity of X income effect Quantity of X

    Substitution effect

    In this case, both of the substitution and the increase the quantity of X consumed. If X is an inferior good
    then the income effect will be negative, so the income effect will slightly reduce the quantity of X
    consumed.
    Income and substitution both

    Quantity of Y

    B2

    Income C

    B I2

    Substitution A

    B1 I1

    0 Quantity of X

    Substitution effect

    Income Effect

    So, here graph shows the price changing situation of both income and substitution effects. The effects of
    a change in price be broken down into an income effect and a substitution effect, the movement along
    an indifference curve to a point with a different marginal rate substitution is shown here as the change
    from point A to B along indifference curve I1, the income effect- is shown here as the change from point
    B on indifference curve I1 to point on indifference curve I2.

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