ECON101 Lecture Notes - Lecture 7: Giffen Good, Indifference Curve, Demand Curve

• School: University of Waterloo
• Department: Economics
• Course: ECON101
• Professor: Corey Van De Waal

Document Summary

When income increases, the quantity bought decreases. Income effect is negative and works against the substitution effect. If substitution effect dominates, the demand curve still slopes downward. 7. 4 decomposition of a price change revisited. The substitution effect is the change in demand for good x when only the relative prices have changed but utility has not. The income effect is the change in demand that is due to the change in purchasing power when relative prices remain unchanged. The total effect of the price change is the sum of the substitution effect and the income effect. To decompose the price change into the substitution effect and the income effect, we need to take away just enough income so that the consumer is just as well off as they were before the price change. Resulting budget line is called the compensated budget line.