Class Notes (836,862)
Canada (509,935)
Economics (806)
ECON366 (28)
Lecture 14

ECON366 Lecture 14: Uncompensated Costs

3 Pages
44 Views
Unlock Document

Department
Economics
Course
ECON366
Professor
Dana Andersen
Semester
Fall

Description
ECON 366 Lecture Substitution and Income effects Compensated Price Change Formula Chart A (PxPy) 0 (PxPy)1 Assume (PxPy) 0 < (PxPy)1 The change in consumption bundle corresponding compensated is known as the substitution effect (Hicks substitution) Why called a compensated price change? If x goes up, y remains constant, then we give or take their income in order to remain the same indifference curve Suppose P beef goes up, what is the welfare effect of this? The welfare effect is same thing of amount that we have to give to the individual to remain the same indifference curve. What is substitution effect? The marginal rate of substitution is decreasing as increasing X, if the x relative to y is increasing, then we look for the compensated change, so we try to decrease x consumption and increase y Income changes Formula Chart B Suppose I o 1 , andoI < 1 I = P X + P Y, o x y Bo: y = IoPy PxPyX B1: y = I1Py PxPyX The change of income directly cause the change of consumption, A: combination of X and Y B: combination of X and Y after the change of income (goes up) X is a normal good, when income goes up, then X consumption increases X is an inferior good, when income goes up, then X consumption decreases Ex. burning wood for heating, as individual has higher level income they probably burn less wood for heating, such as gas The change in consumption decisions due to change in income is called income effect Uncompensated Price Change It consists of two effects:
More Less

Related notes for ECON366

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit