Income and substitution effects

Income and substitution effects

1. INCOME AND SUBSTITUTION EFFECTS

2. Income Effect The potential increase in the consumption of both commodities. Substitution Effect Measures how much the higher price encourages consumers to use other goods, assuming the same level of income.

3. Figure 33: Income and S ubstitution Effects A B Food Consumption Commodity Consumption

4. Derivation of the Demand Curve There is a potential consumption for a certain commodity item given its market price and the income of its potential consumers. UTILITY AND DEMAND

5. CONSUMER SURPLUS The peso value that the consumer pays for a certain volume of a commodity is less than the peso value of the benefit from its consumption.

6. Figure 35: Consumer Surplus in Monetary Units Price Quantity of Demand D

7. Price p q o n i Surplus e D Quantity of Demand

8. Figure 36: Consumer Surplus and Utility o n Surplus

9. THE PARADOX VALUE PAUL SAMUELSON “ The total utility of water does not determine its price or demand .”