University:
Elon University
Course:
ECO 1000: Economics
Academic year:

2023
Views:

359

Pages:

2
Author:

MCerah

Understanding Price Changes and Total Effects in the Indifference Curve Approach Changes in the maximum utility combination by showing the substitution effect, income effect and total effect. Px 10 8 Py 8 8 M 80 80 x 3,6 4,7 y 5,5 5,3 MUx 18,5 17,9 MUy 14,8 18,1 Umax 108,6 125,33 M/Px = 8 M/P'x = 10 M/Py = 10 y 10 5,5 5,3 x AB C Explanation: Total Effect = AC (+), is the sum of ES and EI from point A to point C in the positive direction. Substitution Effect = AB (+), when the price of X (Px) increases, the purchasing power of good X will increase and the purchasing power of good Y will decrease. ES with M cateris paribus, is a shift from point A to point B in a positive direction. Effect of Income = BC (+), when the price of X (Px) falls, the real income will increase so that the purchasing power of goods X and Y also increases.EI is a shift from point B to point C in a positive direction.

Understanding Price Changes in the Indifference Curve Approach

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