University:
Acadia University
Course:
ECON 1023 | Economics
Academic year:

2024
Views:

485

Pages:

2
Author:

Nabila N.

Impact of Price Changes on Consumer Equilibrium 1. Price Increase: When the price of a good rises, the consumer faces a higher cost for that good. This leads to two main effects: ○ Substitution Effect: As the price of a good increases, consumers tend to substitute it with cheaper alternatives. For example, if the price of apples rises, consumers may buy more oranges instead. ○ Income Effect: A price increase effectively reduces the consumer's purchasing power, as they can now afford less than before. This change may lead to a decrease in the quantity demanded of the more expensive good, even if the consumer still prefers it. 2. As a result, the consumer may need to adjust their consumption bundle, moving to a new point of equilibrium on a lower indifference curve, reflecting decreased utility. 3. Price Decrease: Conversely, when the price of a good decreases, the consumer experiences the opposite effects: ○ Substitution Effect: Consumers will tend to buy more of the now cheaper good while possibly reducing their consumption of more expensive alternatives. ○ Income Effect: A lower price increases the consumer's real income, allowing them to purchase more goods overall. This can lead to an increase in the quantity demanded of the cheaper good as well as potentially higher consumption of other goods. 4. Consequently, the consumer will likely move to a new point of equilibrium on a higher indifference curve, reflecting increased utility. Graphical Representation Graphically, these changes can be illustrated using indifference curves and budget lines: ● Indifference Curves: Represent combinations of two goods that provide equal satisfaction. Higher curves indicate higher utility levels. ● Budget Line: Shows all possible combinations of two goods that the consumer can afford based on their income and the prices of the goods. When prices change, the budget line pivots. For example: ● If the price of good xx decreases, the budget line shifts outward, allowing the consumer to reach a higher indifference curve. ● If the price of good xx increases, the budget line pivots inward, leading to a lower indifference curve. The new tangency point between the budget line and the indifference curve represents the new consumer equilibrium. Conclusion Changes in prices play a crucial role in determining consumer equilibrium. Price increases typically lead to a decrease in quantity demanded for that good, prompting consumers to seek substitutes and adjust their consumption. In contrast, price decreases result in increased consumption of the cheaper good and a potential rise in overall utility. Understanding these dynamics is vital for economists and policymakers, as they provide insights into consumer behavior, market demand, and the effects of pricing strategies in the economy.