CAS EC 101 Lecture Notes - Lecture 15: Normal Good, Giffen Good, Inferior Good
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The income and substitution effects of a price change on demand: when the price of a good changes, consumers experience two effects. Substitution effect the good whose price has changed may now seem like a better or worse buy in comparison with other goods (changes quantity demanded) I can get something just as good for less money . Income effect the price change may make the consumer feel richer or poorer than before (this changes quantity demanded too) The direction of the income and substitution effects: when you are buying a normal good, the income and substitution effects work in the same direction. If the price of juice increases, you want to buy less juice and more other things (substitution effect) But you also feel poorer, so you want to buy less juice for that reason too (income effect: when you are buying an inferior good, the income and substitution effects work in opposite directions.