W hen you walk into a store, you are confronted with thousands of goods that
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- 446 PART VII tOpICS FOr FUrther StUDY 21-3d Income and Substitution Effects
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of Pizza Quantity of Pepsi 0 Initial optimum New optimum Initial budget constraint New budget constraint I 1 I 2 1. When an increase in income shifts the budget constraint outward . . . 3. . . . but Pepsi consumption falls, making Pepsi an inferior good. 2. . . . pizza consumption rises, making pizza a normal good . . . 65875_ch21_ptg01_433-460.indd 445 15/10/13 11:53 AM Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 446 PART VII tOpICS FOr FUrther StUDY 21-3d Income and Substitution Effects The impact of a change in the price of a good on consumption can be decomposed into two effects: an income effect and a substitution effect. To see what these two effects are, consider how our consumer might respond when she learns that the price of Pepsi has fallen. She might reason in the following ways: • “Great news! Now that Pepsi is cheaper, my income has greater purchasing power. I am, in effect, richer than I was. Because I am richer, I can buy both more pizza and more Pepsi.” (This is the income effect.) • “Now that the price of Pepsi has fallen, I get more liters of Pepsi for every pizza that I give up. Because pizza is now relatively more expensive, I should buy less pizza and more Pepsi.” (This is the substitution effect.) Which statement do you find more compelling? In fact, both of these statements make sense. The decrease in the price of Pepsi makes the consumer better off. If pizza and Pepsi are both normal goods, the consumer will want to spread this improvement in her purchasing power over both goods. This income effect tends to make the consumer buy more pizza and more Pepsi. Yet at the same time, consumption of Pepsi has become less expensive relative to consumption of pizza. This substitution effect tends to make the con- sumer choose less pizza and more Pepsi. Now consider the result of these two effects working at the same time. The consumer certainly buys more Pepsi because the income and substitution effects both act to increase purchases of Pepsi. But it is ambiguous whether the consumer buys more pizza, because the income and substitution effects work in opposite directions. This conclusion is summarized in Table 1. tải về 1.28 Mb. Chia sẻ với bạn bè của bạn:
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