ECO200Y1 Lecture Notes - Lecture 5: Indifference Curve, Demand Curve, Normal Good
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ECO200Y1 Full Course Notes
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The conceptual basis for income and substitution effects. Explain, in words, the two components of the change in the quantity demanded of x, when its price falls. The hicks method of determining the substitution effect. Use indifference curve analysis to divide the change in the quantity of x demanded when its price changes, as follows: a) b) The substitution effect (se) -- the component due to a (relative) price change, holding (real) income constant. The latter is determined by holding the consumer at the same level of satisfaction as originally (i. e. , the same indifference curve). [note: your text uses the term decomposition basket and decomposition budget line . The lecture uses the term intermediate and labels the relevant point as i . ] Show that the se is always negative i. e. when the price of x falls, the se leads always to the consumption of more x (for convex indifference curves).