Substitution and Income Effects - Essay Example

Substitution and Income Effects Paper Introduction The aspect of income effect is often described as the increase in overall spending that is made feasible through price cut or decrease in the overall spending followed by increase in the price. The substitution effect is fundamentally described as a transformation in relative consumption that occurs because the consumers make the alternative execution of cheaper products in place of costly products (Hirschey, 2008). In other words, it can be stated that the conception of income effect denotes the transformation in consumption types due to the alteration in purchasing power of the buyers. In this context, the substitution effect signifies the alteration in the consumption patterns due to the transformation in the comparative prices of the products. However, both the aspects generally belong to the theory of macroeconomics that is chiefly associated with the significant factor of consumption of the products along with the consumption behavior of the buyers (Tucker, 2010). A graphical depiction of both the aspects of income as well as substitution effects is provided hereunder. Source: (Hirschey, 2008). In the paper, the conception of income as well as substitution effect has been clearly portrayed and certain significant scenarios have been taken into concern on the basis of which the implication of the income or the substitution effect or both the effects will be depicted in the discussion. Drove Less and Purchased Less Gasoline (Analysis) In relation to this particular facet of driving less as well as buying less amount of gasoline, it can be stated that this particular aspect can be regarded as income effect due to the fact of possessing lower amount of money on the basis of which less gasoline has been purchased and subsequently driven less as well. Consequently, in this particular scenario, no substitution effect was found to have occurred (Hirschey, 2008). Thus, this particular scenario i.e. driving less as well as buying less amount of gasoline can be generally considered as the income effect rather than the effect of substitution. A graphical depiction of this particular aspect is provided hereunder: Source: (Oocities, n.d.). You Ate Out Less Often (Analysis) This particular scenario i.e. eating out less often can be regarded as the consequence of both income as well as substitution effect. From the perspective of income effect, it can be stated that this aspect of eating out generally results either from the decrease in the income or change in the consumption pattern. In this similar context, eating out less often can also be recognized as a result of substitution effect because of the involvement of the substitution of eating food at home which is less costly. Moreover, there also lies a broad transformation in the comparative prices between the two variables i.e. eating out or eating at home (Hirschey, 2008). Thus, on the basis of the above discussed grounds, it can be stated that the particular approach of eating out less often can be regarded as the effects of both income as well as substitution. A graphical portrayal of this particular aspect is depicted hereunder: Source: (Hirschey, 2008).You Spent Less to Maintain Your Automobile (Analysis) This particular situation that is associated with spending less for the purpose of maintaining the automobile can be typically regarded as a consequence of income effect. This is due to the reason that less amount of money is available for maintaining the automobile and the entire cost that is incurred for the maintenance of the vehicle has increased considerably. These two particular reasons i.e. possessing lesser amount of money as well as the increased rate of the entire cost i.e. linked with the maintenance of the vehicle ultimately justifies the reason to conclude that this particular scenario of maintaining the vehicle results from the income effect (Hirschey, 2008). A graphical depiction of this particular aspect is provided hereunder. Source: (Oocities, n.d.). You Took Public Transportation More Often (Analysis) This particular circumstance i.e. the availing of public transportation more frequently instead of using own vehicle can be considered as the result of both income as well as substitution effect. In this regard, this aspect is considered to be the consequence of income effect because the public transportation is essentially viewed as an inferior product or good which generally depicts that the access to inferior goods such as public transportation decreases as the income rises. Furthermore, it can also be assumed that the comparative cost has changed between the two substitutable products i.e. the public transportation and the own vehicle that generally depicts the result of substitution effect. Thus, it can broadly be stated that the frequent availment of public transportation apart form own vehicle can be viewed to encompass both the aspects of income as well as substitution effects by a significant level (Hirschey, 2008). A graphical depiction of this particular aspect is represented hereunder. Source: (Hirschey, 2008). You Bought a Bicycle (Analysis) The situation of buying a bicycle can also be regarded as the outcome of both income as well as substitution effects. This conception is totally related with the particular setting of accessing public transportation more frequently rather than using own vehicle i.e. bicycle. Even in this case the theory remains to be the same which denotes that the bicycle can be treated as an inferior sort of product that decreases in value with a raise in income. Moreover, in this similar context, the relative cost has been changed between two substitutable products that ultimately generated the consequence of substitution effect (Hirschey, 2008). A graphical depiction of this particular aspect is given hereunder. Source: (Hirschey, 2008). You Did Not Take a Vacation Away From Home (Analysis) The situation that is associated with not taking a vacation away from home can be treated both as a consequence of substitution as well as income effect. In this context, it can be stated that the aspect of vacation is fundamentally regarded to be a luxury that ultimately would decrease as the income experiences a fall. Hence, it is regarded as an income effect. Besides, there lies every possible chance for substituting a cheaper vacation which can be taken at home itself without visiting any outside location that is not far away from home and thus can be viewed as a result of substitution effect (Hirschey, 2008). Thus, collectively, it can be stated that this particular scenario i.e. not taking a vacation away from home can be observed to have taken place due to both income as well as substitution effects. A graphical representation of this particular aspect is depicted hereunder. Source: (Hirschey, 2008). You Bought Fewer Clothes and Made Due with More around the Home (Analysis) The circumstance i.e. purchasing fewer clothes and made due with more around the home fundamentally depicts the outcome of income effect. The definition of income effect states that the transformation especially in the consumption pattern takes place due to the alteration in the purchasing power of the buyers. The above mentioned scenario can be viewed as the result of an income effect. This is due to the fact that the purchase of fewer clothes implies that it is not affordable to buy new clothes. Therefore, a somewhat compromised scenario is adopted where the previously available products have been made use of (Hirschey, 2008). Thus, the above discussed situation might be regarded as the income effect rather than substitution effect. A graphical portrayal of this particular aspect is given hereunder. Source: (Oocities, n.d.). Conclusion The valuable conceptions that include income as well as substitution effects are associated with the subject matter of macroeconomics and pose significant influence upon the demand of a particular buyer or consumer especially on the price factor of different commodities. The consequences due to the effect of income along with substitution effect also play an imperative part in determining the budget factor by a considerable extent. The role and the outcome of both the effects have been depicted on the basis of the provided situation that is based upon the theory of purchasing power of the consumers or buyers. The application of the individual as well as the combined effects i.e. income as well as substitution effects have also been performed in each of the scenario in order to justify the purchasing power of the buyers or consumers. References Hirschey, M. (2008). Managerial economics. United States: Cengage Learning. Oocities. (n.d.). Supply & demand. Retrieved from http://www.oocities.org/drkestrel/econ/econ2.html Tucker, I. B. (2010). Economics for today. United States: Cengage Learning. Read More