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A Level Economics:

TheZodiac

TheZodiac

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muzirox said:
AOA, Sir Qamar Baloch can u plzz explain the concept of substitute and income effect.
Click to expand...
Walikumasalam
I thought I could help so here goes;
Due to rise or fall in price level, the quantity demanded by the consumer changes. If there's a fall in price, there are two effects that result in overall increase in quantity being demanded. That is substitution effect and income effect.
Now if we notice this graph, the price is falling from P1 to P3 and therefore the quantity demanded is being increased from q1 to q3.
The reason I've broken this is because due to fall in price, the quantity demanded from Q1 to Q2 is due to substitution effect as this means that the consumer now substitutes more of good X for any other good. However, he feels that as the price has fallen and the good has become 'cheaper' (his real income has also increased) there's room for more further increase in quantity demanded so he demands more from Q2 to Q3. This is income effect.
graph 1.png
Now similarly, if there's a rise in price level, the situation is vice versa.
The graph of income and substitution effect are basically shown by the help of budget lines and indifference curves. Now here's a very important concept you need to learn as the behavior of consumer is different when consuming different types of goods. (Normal, Inferior and Giffen)
In price fall:
Graph 2.png
Therefore, diagramatically, it'd be drawn as: (I presume you're already familiar with Indifference curve and Budget line. )
graph 3.png
Initially, the consumer was at point 'a' level of satisfaction but due to fall in price, the consumer switched to buying of more of good X and less of good Y. However, the consumer is still at the same budget line as the real income is kept constant. So from point a to point b, the consumer is experiencing substitution effect (+ as referred in the table) and a positive income effect as the Indifference curve shifts upward. The new level of maximum satisfaction is now point c while the movement from q1 to q3 represents total effect of price fall.

The graph of Inferior good and Giffen is made differently and also, the effect of price rise. I'd explain that later but do let me know if you conceived this or not?

I hope I helped.
 
Qamar Baloch

Qamar Baloch

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TheZodiac said:
Walikumasalam
I thought I could help so here goes;
Due to rise or fall in price level, the quantity demanded by the consumer changes. If there's a fall in price, there are two effects that result in overall increase in quantity being demanded. That is substitution effect and income effect.
Now if we notice this graph, the price is falling from P1 to P3 and therefore the quantity demanded is being increased from q1 to q3.
The reason I've broken this is because due to fall in price, the quantity demanded from Q1 to Q2 is due to substitution effect as this means that the consumer now substitutes more of good X for any other good. However, he feels that as the price has fallen and the good has become 'cheaper' (his real income has also increased) there's room for more further increase in quantity demanded so he demands more from Q2 to Q3. This is income effect.
View attachment 34721
Now similarly, if there's a rise in price level, the situation is vice versa.
The graph of income and substitution effect are basically shown by the help of budget lines and indifference curves. Now here's a very important concept you need to learn as the behavior of consumer is different when consuming different types of goods. (Normal, Inferior and Giffen)
In price fall:
View attachment 34722
Therefore, diagramatically, it'd be drawn as: (I presume you're already familiar with Indifference curve and Budget line. )
View attachment 34723
Initially, the consumer was at point 'a' level of satisfaction but due to fall in price, the consumer switched to buying of more of good X and less of good Y. However, the consumer is still at the same budget line as the real income is kept constant. So from point a to point b, the consumer is experiencing substitution effect (+ as referred in the table) and a positive income effect as the Indifference curve shifts upward. The new level of maximum satisfaction is now point c while the movement from q1 to q3 represents total effect of price fall.

The graph of Inferior good and Giffen is made differently and also, the effect of price rise. I'd explain that later but do let me know if you conceived this or not?

I hope I helped.
Click to expand...

nice work
 
Qamar Baloch

Qamar Baloch

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maverick35 said:
This is the first time I am doing CIE and I was wondering if the results sheet contains are ums and grade for each module or does it only tell us the overall subject grade and ums.
Click to expand...
by tomorrow you will get the overall grade of each subject. but a weel later you will receive the component result which shows your grade in each paper/module
 
M

maverick35

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Qamar Baloch said:
by tomorrow you will get the overall grade of each subject. but a weel later you will receive the component result which shows your grade in each paper/module
Click to expand...

Thanks Sir, will I also receive the overall module percentage/UMS?

Will you be writing any university economics books?
 
M

muzirox

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TheZodiac said:
Walikumasalam
I thought I could help so here goes;
Due to rise or fall in price level, the quantity demanded by the consumer changes. If there's a fall in price, there are two effects that result in overall increase in quantity being demanded. That is substitution effect and income effect.
Now if we notice this graph, the price is falling from P1 to P3 and therefore the quantity demanded is being increased from q1 to q3.
The reason I've broken this is because due to fall in price, the quantity demanded from Q1 to Q2 is due to substitution effect as this means that the consumer now substitutes more of good X for any other good. However, he feels that as the price has fallen and the good has become 'cheaper' (his real income has also increased) there's room for more further increase in quantity demanded so he demands more from Q2 to Q3. This is income effect.
View attachment 34721
Now similarly, if there's a rise in price level, the situation is vice versa.
The graph of income and substitution effect are basically shown by the help of budget lines and indifference curves. Now here's a very important concept you need to learn as the behavior of consumer is different when consuming different types of goods. (Normal, Inferior and Giffen)
In price fall:
View attachment 34722
Therefore, diagramatically, it'd be drawn as: (I presume you're already familiar with Indifference curve and Budget line. )
View attachment 34723
Initially, the consumer was at point 'a' level of satisfaction but due to fall in price, the consumer switched to buying of more of good X and less of good Y. However, the consumer is still at the same budget line as the real income is kept constant. So from point a to point b, the consumer is experiencing substitution effect (+ as referred in the table) and a positive income effect as the Indifference curve shifts upward. The new level of maximum satisfaction is now point c while the movement from q1 to q3 represents total effect of price fall.

The graph of Inferior good and Giffen is made differently and also, the effect of price rise. I'd explain that later but do let me know if you conceived this or not?

I hope I helped.
Click to expand...
Actually i was asking this in wage changes like leisure and working hours.
 
Qamar Baloch

Qamar Baloch

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Dear students I have decided to spare some time on daily basis to discuss some specific topic with you.
We will complete the entire syllabus of AS level in Feb. 2014.
Discussion may include syllabus contents, MCQS and essay questions.
Try to post your doubts according to the following schedule;
1. Basic economic ideas, PPC, Economic systems on 02-02-2014
2. Demand and suuply on 03-02-2014
3. equilibrium, and changes in equilibrium on 04-02-2014
4. disequilibrium on 05-02-2014
5. PED on 06-02-2014
6. PES on 07-02-2014
7. XED on 08-02-2014
8. YED on 09-02-2014
9. Labour market on 10-02-2014
10. Inflation on 11-02-2014
11. International trade, TOT, protectionism on 12-02-2014
12. Balance of payment on 13-02-2014
13. Exchange rate on 14-02-2014
14. complete paper of MCQS on 15-02-2014
15. Complete paper-2 on 16-02-2014
 
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