ECON 1101 1nd Edition Lecture 22 Outline of Last Lecture I Consumer theory and demand curve II Optimal Consumption Bundle and demand curve III Impact on demand from change in price a Substitution effect b Income effect Outline of Current Lecture II Income Change III What happens to optimal consumption bundle if the price changes a Income effect b Substitution effect Current Lecture Income Change Price stays the same in income increases EX 24 40 income 4 price Recall inferior good income goes up you buy less normal good income goes up you buy more With income change the budget constraint bc line is a parallel shift to the right when income increases and the good is a normal good Shift to the left with the income decreases The slope of bc is the opportunity cost buy 1 more of X how many Y do you give up Changes optimal consumption bundle amount bought budget constraint line These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Doesn t change opportunity cost cost of products Happier more utility when more northeast on the graph Inferior Good Its impossible to have two inferior goods You can have two normal goods or one normal one inferior Compare OCB consume more after income change increase Normal good Consumer less after income change increase Inferior Good What Happens to Optimal Consumption Bundle if the Price Changes When price changes 1 OCB goes down BC slope changes 2 Getting more income EX income 24 P juice 2 P curds 4 Change P curds 1 If we stick with the same BC then we would have 9 extra 3 3 9 We can buy more of items DEPENDING ON PREFERENCE Income Effect Change in income holding opportunity cost at fixed new level Spam 5 Income 30 Buy 6 cans Spam 10 Income 30 Buy 3 cans Spending power changes when price changes Substitution Effect Effect on change in opportunity cost Same indifference cure as before Income 30 millions of different goods to choose from spending power is negligible Opportunity cost for spam changes because other goods are there for substitutes Putting them together Total effect final OCB Remember opportunity cost changes purchasing power or income changes Take new slope shift it back to the original indifference curve A S is susbstitution effect S C is income effect A C is total effect Subsitution effect New opportunity cost on the same indifference curve Recall that optimal consumption bundle OCB is point where 1 On budget constraint line 2 Marginal rate of consumption P curds P juice Price of good changes both 1 and 2 are messed up therefore you need a new OCB
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