Textbook Notes (363,452)
Canada (158,372)
Economics (800)
ECON 2310 (47)
Chapter 6

Chapter 6 Intermediate Micro Notes

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University of Guelph
ECON 2310
Johanna Goertz

Chapter 6 Economics From Demand to Welfare61 Dissecting the Effects of a price changeWhen the price of a good increases The good becomes more expensive relative to all other goods Consumers purchasing power declines bc dollar doesnt go as far anymoreCompensated Price ChangesUncompensated price change consists of a price change with bi change in income Compensated price change consists of a price changean income change which together leave the consumers wellbeing unaffected one cancels out the otherSubstitutionIncome EffectsEffect of a compensated price changeThe effect of an uncompensated price changeEffect of providing compensationSubstitution effect of a price change The effect on consumption of a compensated price changeEffect of an uncompensated price changeThe effect of a compensated price changeEffect of removing compensationIncome effect of a price change The effect on consumption of removing the compensation after creating a compensated price change The Direction of SubstitutionIncome Effects A compensated increase in the price of a good causes consumer to buy less of that goodSubstitute away A compensated reduction in the price of a good causes consumer to buy more of that goodSubstitute towards If the good is Normal the income effects therefore negative for a price increasepositive for a price reduction If the good is inferior the income effect therefore is positive for a price increasenegative for a price reductionWhy do demand curves usually slope downwardsLaw of demand states that demand curves usually slope downwards Substitution effect shows an increase
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