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Consumer optimisation, income and substitution effects

Published on July 31, 2019   18 min
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Hi. I'm Dr. Sangaralingam Ramesh. Welcome to this Henry Stewart talk series Introduction of microeconomics talk Number 8. In this talk, we'll be looking at consumer optimization, income and substitution effects varying with the nature of the type of good. So in this talk, we'll actually be putting together many of the other things that we've learned in previous talks, where we've looked at the consumption optimization behavior, we've looked at income and substitution effects and we've also looked at the different types of goods.
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So in the context of consumer optimization. Firstly, we need to consider the effect of the change in the price of the good and in this case, this can be analyzed using the diagram in the slide where we have the price of good X on the vertical y-axis and the quantity of good X on the horizontal x-axis. In this case, we see that the price of a good falls from P1 to P2 and as a result the quantity demanded increases from Q1 to Q2. As a result, there is a movement along the demand curve from point a to point B and this is the price effect. As we saw in one of the previous talks, the price effect is equal to the income effect plus the substitution effect, and the impact of the price change will have different consequences for the income effect and the substitution effect which means, that for different types of goods, the price effect will be different for a change in the price of a good.
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Consumer optimisation, income and substitution effects

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