Scribd Logo
Upload

Welcome to Scribd!

  • 67 views

    Economics

    Uploaded by

    upstar_mughal
    The document provides definitions and explanations of key economic concepts relating to the law of demand. It defines nominal income, real income, substitution effect, and income effect. It also defines normal goods and inferior goods. It then presents three cases: 1) When a good is normal, its demand curve is negatively sloped. 2) When a good is inferior and the substitution effect outweighs the income effect, its demand curve is also negatively sloped. 3) In rare cases when a good is inferior and the income effect outweighs the substitution effect, known as the Giffen paradox, its demand curve can be positively sloped.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd

    Economics

    Uploaded by

    upstar_mughal
    67 views2 pages
    The document provides definitions and explanations of key economic concepts relating to the law of demand. It defines nominal income, real income, substitution effect, and income effect. It also defines normal goods and inferior goods. It then presents three cases: 1) When a good is normal, its demand curve is negatively sloped. 2) When a good is inferior and the substitution effect outweighs the income effect, its demand curve is also negatively sloped. 3) In rare cases when a good is inferior and the income effect outweighs the substitution effect, known as the Giffen paradox, its demand curve can be positively sloped.

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document provides definitions and explanations of key economic concepts relating to the law of demand. It defines nominal income, real income, substitution effect, and income effect. It also defines normal goods and inferior goods. It then presents three cases: 1) When a good is normal, its demand curve is negatively sloped. 2) When a good is inferior and the substitution effect outweighs the income effect, its demand curve is also negatively sloped. 3) In rare cases when a good is inferior and the income effect outweighs the substitution effect, known as the Giffen paradox, its demand curve can be positively sloped.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    67 views2 pages

    Economics

    Uploaded by

    upstar_mughal
    The document provides definitions and explanations of key economic concepts relating to the law of demand. It defines nominal income, real income, substitution effect, and income effect. It also defines normal goods and inferior goods. It then presents three cases: 1) When a good is normal, its demand curve is negatively sloped. 2) When a good is inferior and the substitution effect outweighs the income effect, its demand curve is also negatively sloped. 3) In rare cases when a good is inferior and the income effect outweighs the substitution effect, known as the Giffen paradox, its demand curve can be positively sloped.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    A Formal Explanation to the Law of Demand and the Giffen Paradox

    Definition of Key Concepts:

    1. Nominal Income: The value of a consumer’s income measured in terms of current


    dollars and cents. For example, Mr. Jones monthly income is $25, 000.

    2. Real Income: The purchasing power, that is, the amount of goods and services the
    income of a consumer can purchase or the value of a consumer income in terms of
    constant dollars--income adjusted to changes in prices.

    3. The Substitution Effect (of a price change): refers to the change in the quantity
    demanded of a product resulting exclusively from a change in its price when the
    consumer’s real income is held constant.

    • The substitution effect is always negative. That is, it changes in the opposite
    direction form the change in price.

    4. The Income Effect (of a price change): refers to the change in the quantity demanded
    of a product exclusively associated with a change in real income.

    • The income effect can be either negative or positive depending whether the
    good (product) under consideration is inferior or normal.

    5. Normal Good: A good is said to be normal if its consumption increases or decreases


    with an increase or decrease in income, respectively. Thus, the consumption of a normal
    good and changes in consumer income are positively related.

    6. Inferior Good: A good is said to be inferior if its consumption increases or decreases


    with a decrease or an increase in income, respectively. Thus, the consumption of an
    inferior good and changes in consumer income are negatively related.

    7. The Price Consumption Curve: is the locus of utility maximizing combinations of


    products when changes in one of the product price occur holding all other factor
    affecting demand constant.
    AN EXPLANATION FOR WHY THE DEMAND CURVE FOR A CONSUMER IS
    NEGATIVELY SLOPED.

    Case I: Good X is Normal


    1. Price Substitution Income Effect 2. Total Effect
    Change Effect (a) (b) ( a + b) Implication
    Price of good Purchase more Purchase more Purchase more The price and
    X decreases of good X of good X of good X quantity
    demanded of
    Price of good Purchase less of Purchase less of Purchase less good X are
    X increases good X good X of good X inversely
    related.

    Case II: Good X is Inferior and Substitution Effect Outweighs Income Effect
    1. Price Substitution Income Effect 2. Total Effect
    Change Effect (a) (b) (a + b) Implication
    Price of good Purchase more Purchase less of Purchase more The price and
    X decreases of good X good X of good X. quantity
    demanded of
    Price of good Purchase less of Purchase more Purchase less good X are
    X increases good X of good X of good X inversely
    related.

    Case III. Good X is Inferior and Income Effect Outweighs Substitution Effect
    1. Price Substitution Income Effect 2. Total Effect
    Change Effect (a) (b) (a + b) Implication
    Price of good Purchase more Purchase less of Purchase less Price and
    X decreases of good X good X of good X. quantity
    demand are
    Price of good Purchase less of Purchase more Purchase more directly related
    X increases good X of good X. of good X (the Giffen
    Paradox)

    You might also like