CAS EC 101 Lecture Notes - Lecture 15: Marginal Cost, Prussian P 8, Opportunity Cost

• School: Boston University
• Department: Economics
• Course: CAS EC 101
• Professor: Michael Manove

Document Summary

*on midterm ii: calculate area under graph (of rectangle, triangle) The income and substitution effects of a price change on demand. When the price of a good changes, consumers experience two effects. Substitution effect: the good whose price has changed may now seem like a better (or worse) buy in comparison with other goods. Income effect: the price change may make the consumer feel richer (or poorer) than before. Example: you were planning to buy an iphone. But you see that the price of the iphone has risen by 40 percent. I can get something just as good for less money. that"s the substitution effect. You would rather spend your money on a huawei mate 9 (an. I can"t afford that. that"s the income effect. You will make-do with a less expensive device. The direction of the income and substitution effects. When you are buying a normal good, the income and substitution effects work in the same direction.