ECON 2310 Chapter Notes - Chapter 6: Economic Surplus
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6. 1 dissecting the effects of a price change. When the price of a good increases . The good becomes more expensive relative to all other goods. Consumers purchasing power declines b/c dollar doesn"t go as far anymore. Uncompensated price change: consists of a price change with bi change in income. Compensated price change: consists of a price change & an income change which together leave the consumer"s well-being unaffected (one cancels out the other) Effect of a compensated price change = the effect of an uncompensated price change + effect of providing compensation. Substitution effect of a price change: the effect on consumption of a compensated price change. Effect of an uncompensated price change = the effect of a compensated price change + effect of removing compensation. Income effect of a price change: the effect on consumption of removing the compensation after creating a compensated price change.