Chapter 5: Substitution and Income Effects
Hans Haller Changes in market conditions or taxes may affect a consumer’s budget constraint. The consumer’s response to a change of the budget constraint is of theoretical and practical relevance. But in general, it proves difficult if not impossible to determine how the consumer’s demand is affected by a new budget situation. With n goods, a consumption bundle is represented by an n-dimensional vector of the form x 5 (x1, . . ., xn) and a price system assumes the form p 5 (p1, . . ., pn) . Moreover, a number m . 0 stands for the consumer’s nominal income or wealth. Attention will be confined to price–income pairs (p, m) that give rise to a unique bundle x 5 f (p, m) demanded under the corresponding budget constraint. Then the comparative statics question of how the consumer responds to a change of the budget constraint can be formulated as follows: Suppose an original budget situation (A) given by the price–income pair (p,m) and demand xA 5 f (p, m) and a new budget situation (C) given by the price– income pair (pr, mr) and demand xC 5 f (pr, mr) What is the total effect TE 5 xC 2 xA? The answer is easy if the numerical values of xA 5 f (p, m) and xC 5 f (pr, mr) are explicitly given and easily computed. A greater challenge occurs if the numerical values are unknown or hard to obtain. Then little can be said about the total effect TE without further restrictions...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.