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

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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Rayhan Kabir 1520290031
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113 views3 pages

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

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.

Uploaded by

Rayhan Kabir 1520290031
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

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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