Economics Presentation-PRICE EFFECT

PRICE EFFECT IN ECONOMICS

1. ECONOMICS PRESENTATION TOPIC- PRICE EFFECT PRESENTED BY: PRAVEEN KUMAR ROLL-882041 BBALLB(3 RD SEM)

2. PRICE EFFECT It is the change in demand, in response to a change in price of a commodity, other things remaining constant. Other Things : Income of the consumer, Tastes and Preference of the consumer, Price of other goods. All these are treated to be constant.

3. Proportionate change in Quantity demanded of x Proportionate change in Price of x Price Effect =

4. It is said that Price Effect is the summation of two effects : Substitution Effect. Income Effect. PRICE EFFECT = INCOME EFFECT + SUBSTITUTION EFFECT

5. TO DISCUSS THE COMPONENTS Every price change therefore can be decomposed into Income Effect and Substitution Effect. SUBSTITUTION EFFECT : In this effect the consumer is forced to chose a product that is less expensive for maximizing his satisfaction as the nominal income of the consumer is fixed.

6. INCOME EFFECT The Income effect can be discussed for two types of commodities : NORMAL GOODS : If there is a price fall real income increases due to which demand increases and vice versa. INFERIOR GOODS : Due to an increase in real income demand decreases. GIFFEN GOODS : Demand decreases when price decreases.