StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Substitution and Income Effects - Essay Example

Cite this document
Summary
This essay describes the aspect of income effect, that is the increase in overall spending that is made feasible through price cut or decrease in the overall spending as well as the substitution effect is fundamentally described as a transformation in relative consumption…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER98.4% of users find it useful
Substitution and Income Effects
Read Text Preview

Extract of sample "Substitution and Income Effects"

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
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Substitution and Income Effects Essay Example | Topics and Well Written Essays - 1250 words”, n.d.)
Substitution and Income Effects Essay Example | Topics and Well Written Essays - 1250 words. Retrieved from https://studentshare.org/business/1452016-substitution-and-income-effects
(Substitution and Income Effects Essay Example | Topics and Well Written Essays - 1250 Words)
Substitution and Income Effects Essay Example | Topics and Well Written Essays - 1250 Words. https://studentshare.org/business/1452016-substitution-and-income-effects.
“Substitution and Income Effects Essay Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.org/business/1452016-substitution-and-income-effects.
  • Cited: 0 times

CHECK THESE SAMPLES OF Substitution and Income Effects

Interest Rate Parity in Exchange Rates

It is somewhat reflected in the interest rates which themselves are prices of present-future substitution (abstinence); this influences savings, consumption, demand for goods, and so, money (both domestic and foreign) and hence the related prices.... Abstract: The paper argues that the covered and uncovered interest rate parity conditions do figure in determining exchange rates among countries allowing free capital mobility and flexible exchange rates....
6 Pages (1500 words) Essay

The Main Attractions of an Import Substitution Strategy

The paper "The Main Attractions of an Import substitution Strategy" discusses that on a global scale, the issue of productivity and efficiency may still be properly managed by the market.... In such context, Wikipedia (2006) said: “Import substitution industrialization (also called ISI) is a trade and economic policy based on the premise that a developing country should attempt to substitute products which it imports, mostly finished goods, with locally produced substitutes....
8 Pages (2000 words) Assignment

Labor Economics: The Factors That Contribute To The Minimum Wage

The main objective of the assignment "Labor Economics: The Factors That Contribute To The Minimum Wage" is to investigate the relationship between the unemployment rate and the value of the minimum wage.... Furthermore, the writer addresses the decline in the minimum wage.... hellip; The difference between Q0 and Q1 unemployment....
11 Pages (2750 words) Assignment

Income and Substitution Effects of a Price Change

In the report “Income and Substitution effects of a Price Change” the author analyzes the objects of the consumer choice, which is called consumption bundle.... Now, an income tax is taken into consideration which raises the revenue by the same amount as the tax.... The rate at which the consumer likes to substitute goods is called the marginal rate of substitution....
6 Pages (1500 words) Essay

Beckers Model of Household Production

The income constraint requires that the net household income should equal expenses on market items.... The income constraint requires that the net household income should equal expenses on market items, where p is the price of household output, w is the hourly income, r is the price of variable inputs, and s is the price of market items.... Thus: P ( Y­C ) – w Tw – rV = sM We obtain full income constraint by such an expression after a little change: wT = ƩNi=l FCi Where FCi= total cost of a good and FCi = pxi + wti where p= price index of xi, w= wage rate, xi= summed inputs in production and consumption of an item, while t is time spent working....
6 Pages (1500 words) Assignment

Macroeconomics written paper

income is a budgetary constraint and a rise in income will affect consumer behavior according to consumer theory.... The income effect as proposed by the consumer theory indicates that a rise in income makes a consumer to have more purchasing power of a product.... Increasing income leads to a shift of the budget constraint line out parallel.... The income has increased and this means that there is more resources to purchase the same products in more quantities....
5 Pages (1250 words) Assignment

Effect of Taxation and Tux Cut

The paper “Effect of Taxation and Tux Cut” seeks to evaluate the payment made by the people to the government which no services or goods are provided directly to the people who have made that contribution.... There are many arguments for taxation but depend on the circumstances at a particular period....
5 Pages (1250 words) Assignment

The Income Effect

This assignment "The Income Effect" distinguishes between income and substitution effects for an inferior good and a normal good, discusses whether vouchers are better than cash for essential items for the less well off and explains the model of price discrimination.... nbsp; Particularly the changes in the relative price of a good have both income and substitution effects.... Either the income or substitution effect is dominant depends on the magnitude of the price change and on the nature of the good....
8 Pages (2000 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us