ECON 201 Lecture Notes - Lecture 14: Budget Constraint, Inferior Good, Indifference Curve
ECON 201 – Lecture 14 – Chapters 13 and 21
*All charts and graphs based off or replicated by Joel Han in class unless stated otherwise
Income and Substitution Effect
Substitution Effect
oChange in the slope of the budget constraint / relative price
oSliding along the original indifference curve. Consumer is no better/worse off
than before
oA to C
Income Effect
oParallel shift in budget constrain
oAnalyze the same way as you would a shift in income
oC to B
find more resources at oneclass.com
find more resources at oneclass.com
*Note* Both goods are normal because when there is a switch from C to
B, both pizza and soda quantities increase
Pizza as Inferior Example
If pizza were an inferior good, B would become D and I2 would move to I3
oSince pizza is inferior and is on the line representing an increase in income, D
would have to be less than C because of the law of the inferior good (if income
rises, demand falls)
Application: Interest Rate and Saving
Big question: When interest rates on savings deposits rise, what happens to saving?
oTwo kinds of goods: consumption when young (Y), consumption when old (L)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Econ 201 lecture 14 chapters 13 and 21. *all charts and graphs based off or replicated by joel han in class unless stated otherwise. Substitution effect: change in the slope of the budget constraint / relative price, sliding along the original indifference curve. Consumer is no better/worse off than before: a to c. Income effect: parallel shift in budget constrain, analyze the same way as you would a shift in income, c to b. *note* both goods are normal because when there is a switch from c to. Big question: when interest rates on savings deposits rise, what happens to saving: two kinds of goods: consumption when young (y), consumption when old (l) As a young worker, earn income (i) Spend now or save (interest rate is r) for old age. Income split between y and s (savings): y+s = i. Saving itself is not a good, good is consumption at old age:
