复旦大学本科微观经济学lecture06.pptVIP

Changes in Price: Complements, Substitution and Income Effects Key Issues Substitutes and Complements Cross-Price Elasticity Implications for Price Consumption Curve Income and Substitution Effects Substitutes Complements Two goods are considered complements if an increase (decrease) in the price of one leads to a decrease (increase) in the quantity demanded of the other (Ex: gasoline and motor oil) If two goods are independent, then a change in the price of one good has no effect on the quantity demanded of the other (Ex: price of chicken and price of airplane tickets) Two goods are considered substitutes if an increase (decrease) in the price of one leads to an increase (decrease) in the quantity demanded of the other (Ex: movie tickets and video rentals) Substitutes Complements If the price consumption curve is downward-sloping, the two goods are considered substitutes If the price consumption curve is upward-sloping, the two goods are considered complements They could be both Income and Substitution Effects A change in the price of a good has two effects: Substitution Effect Income Effect Substitution Effect Relative price of a good changes when price changes Consumers will tend to buy more of the good that has become relatively cheaper, and less of the good that is relatively more expensive Income Effect Consumers experience an increase in real purchasing power when the price of one good falls Income and Substitution Effects Substitution Effect The substitution effect is the change in an item’s consumption associated with a change in the price of the item, with the level of utility held constant When the price of an item declines, the substitution effect always leads to an increase in the quantity demanded of the good Income and Substitution Effects Income Effect The income effect is the change in an item’s consumption brought about by the increase in purchasing power, with the price of the item held constant When a person’s income increases, the quanti