46: Income effects, substitution effects, and elasticity

Question 1

substitution effect

Answer 1

-the change in quantity demanded as the good that has become relatively cheaper is substituted for the good that has become relatively more expensive

Question 2

income effect

Answer 2

-the change in the quantity of a good demanded that results from a change in the overall purchasing power of the consumer’s income due to the change in the price of that good

Question 3

For what goods is the substitution effect most influential?

Answer 3

Goods that take up a small share of a consumer’s income

Question 4

how does the income effect work with the substitution effect?

Answer 4

The income effect reinforces the sub. effect for normal goods, and works against it for inferior goods

Question 5

elasticity

Answer 5

the responsiveness of one variable to another

Question 6

price elasticity of demand and equation

Answer 6

measures responsiveness of quantity demanded to change in price
= %∆Q/%∆P

Question 7

midpoint method for Ep

Answer 7

Ep = (∆Q/avgQ)/(∆P/avgP)