Income, Substitution And Price Effects For Normal, Inferior And Giffen Goods
Economics notes
Income, Substitution And Price Effects For Normal, Inferior And Giffen Goods
➡️ Changes in prices: A change in the price of a good or service can cause a shift in the budget line. For example, if the price of a good increases, the budget line will shift outward, as the consumer will have to spend more money to purchase the same quantity of the good.
➡️ Changes in income: An increase in income will cause the budget line to shift outward, as the consumer will have more money to spend on goods and services. Conversely, a decrease in income will cause the budget line to shift inward, as the consumer will have less money to spend.
➡️ Changes in preferences: A change in the consumer's preferences can also cause a shift in the budget line. For example, if the consumer's preferences shift towards a certain good, the budget line will shift outward, as the consumer will be willing to spend more money on that good.
What is the income effect for normal goods?
The income effect for normal goods is the change in quantity demanded of a good due to a change in income, holding the price of the good constant. As income increases, the quantity demanded of normal goods also increases, and vice versa.
How does the substitution effect work for inferior goods?
The substitution effect for inferior goods is the change in quantity demanded of a good due to a change in its price, holding the consumer's real income constant. As the price of an inferior good decreases, consumers switch to higher-quality substitutes, leading to a decrease in the quantity demanded of the inferior good.
What is the price effect for Giffen goods?
The price effect for Giffen goods is the change in quantity demanded of a good due to a change in its price, holding the consumer's real income constant. Unlike normal and inferior goods, the price effect for Giffen goods is positive, meaning that as the price of a Giffen good increases, the quantity demanded also increases due to the income effect outweighing the substitution effect.