MGEB02H3 Chapter : Week 4 and 5 chapter notes
5 Dec 2010
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The lower the price of the product, the higher the level of utility. N when the income-consumption curve has a positive slope, the quantity demanded increases with income. This response to a change in the relative prices of goods is called the substitution effect: because one of the goods is now cheaper, consumers enjoy an increase in real purchasing power. They are better off because they can buy the same amount of the good for less money, and thus have money left over for additional purchases. The change in demand resulting from this change in real purchasing power is called the income effect. substitution effect change in consumption of a good associated with a change in its price, with level of utility held constant. N giffen good good whose demand curve slopes upward because (negative) income effect is larger than the substitution effect.
