1 / 6

AP Economics

This module elaborates on the concepts of income and substitution effects as they relate to the law of demand in AP Economics. It explains how an increase in price leads to a decrease in quantity demanded, illustrating the inverse relationship through a downward-sloping demand curve. The substitution effect demonstrates how consumers shift their buying preferences toward cheaper alternatives when prices change. Additionally, the income effect highlights how changes in real income can influence purchasing decisions, reinforcing the overall demand curve's downward slope.

bianca-clark
Télécharger la présentation

AP Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. AP Economics Mr. Bernstein Module 46 (pp 457-460 only): Income and Substitution Effects October 6, 2014

  2. AP EconomicsMr. Bernstein Law of Demand • All other things equal, as price increases the quantity demanded falls • So there is an inverse relationship between price and quantity demanded • Plotted on a graph, the law of demand infers a downward sloping demand curve • Why?

  3. AP EconomicsMr. Bernstein The Substitution Effect • The downward sloping demand curve and opportunity costs • Costs: Driving into city = $20; bus ticket = $10 • The opportunity cost of driving = 2 bus tickets • If the price of bus tickets rise to $15, the opportunity cost of driving a car decreases to 1.33 bus tickets • Driving becomes relatively cheaper and the quantity demanded rises

  4. AP EconomicsMr. Bernstein The Substitution Effect • The downward sloping demand curve and opportunity costs • Costs: Driving into city = $20; bus ticket = $10 • The opportunity cost of driving = 2 bus tickets • If the price of bus tickets falls to $5, the opportunity cost of driving a car increases to 4 bus tickets • Driving becomes relatively more expensive and the quantity demanded falls

  5. AP EconomicsMr. Bernstein Note on the Substitution Effect • Substitution Effect causes change in Quantity Demanded for product (i.e., QD decreases as consumers shift to cheaper product • It also causes shift in Demand for substitute product (i.e., Dsub increases)

  6. AP EconomicsMr. Bernstein The Income Effect • Changes in real income • Primarily effects major purchases • New job, higher income = nicer car • Lose job, lose income = less nice car • Income not keeping up with inflation = lower real income = less nice car • Reinforces Substitution Effects • Causes Demand Curve to slope downward

More Related