Differences

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--- kb:sd [2022-01-11 22:18] – [Effects of price change] jaeyoung
+++ kb:sd [2024-04-30 04:03] (current) – external edit 127.0.0.1
@@ Line 45: / Line 45: @@
 ==== Effects of price change ====
+When the price of a good changes, it changes the desirability of that good relative to another good (substitution effect), and it also changes your effective income (income effect).
 === Substitution effect ===
@@ Line 52: / Line 54: @@
 $$ \left.\frac{dQ}{dP}\right|_{\bar{U}} $$
-Because utility is kept constant, this is graphically represented by a shift along the original indifference curve. At the new point, the curve will have the slope of the new budget constraint curve (i.e. slope = ratio between prices of goods), although it will not be on the old budget constraint curve. This point is known as the compensated demand because we compensate for the increase in price of one good.
+Because utility is kept constant, this is graphically represented by a shift along the original indifference curve. At the new point, the curve will have the slope of the new budget constraint curve (i.e. slope = ratio between prices of goods), although it will not be on the old budget constraint curve. The budget constraint curve that this point lies on (which is not really achievable) compensates for the increase in price of the good, so it is known as the compensated demand.
-The substitution effect is always negative.
+The substitution effect is always negative because:
+$$ P_X \uparrow \implies \frac{P_X}{P_Y} = \frac{MU_Y}{MU_X} \uparrow \implies \frac{Q_Y}{Q_X} \uparrow$$
 === Income effect ===
 The income effect is the change in the quantity of a good as income changes.
+$$ \left.\frac{dQ}{dY}\right|_\bar{P} $$
-$$ \frac{dQ}{dY} $$
+This is represented by an inward shift of the budget constraint curve from the compensated demand curve down to one that is actually achievable with the same income, although it will have the same slope.
+==== Giffen good ====
+For a Giffen good, the effects of price changes are dominated by the income effect, leading to an increase in quantity demanded with an increase in price and therefore an upward sloping demand curve.