REAL 1820 Lecture Notes - Lecture 14: Indifference Curve, Demand Curve, Relative Price
30 Oct 2017
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Document Summary
Changes in price and changes in income shifting the budget line example below. Preference map: a series of indifference curves. Degree of substitutability: shape of the indifference curve reveals the degree of substitutability. Marginal rate of substitution equals relative price. Price effect: the effect of the change in the price on the quantity of a good consumed. Movement between best affordable choices on different indifference curves due to price effect mirrors the demand curve. Income effect: the effect of the change in income on the quantity of a good consumed. Movement between best affordable choice on different indifference curves (parallel budget lines) is a shift of a demand curve. Substitution effect: is the effect of a change in price on the quantity bought when the consumer (hypothetically) remains indifferent between the original situation and the new one. For a normal good, the income effect reinforces the substitution effect.
