Income Changes

And finance Allah shmoop what our income and substitution effects

Often people seemed set in their ways buying the same

coffee at the same price every day taking the same

bus at the same time every day buying you know

entertainment magazines every day and so on That is until

prices change or our pay changes like our salaries which

makes us then do a double take right Well the

income effect describes how a change in income changes a

consumer's demands Getting a pay raise increases purchasing power which

increases demand for goods and services while taking a pay

cut will lower purchasing power in consumer demand The substitution

effect describes how people substitute one good for another when

either prices income changes or a new rival good arrives

on the market For both the income in substitution effect

it's common that as income rises inferior goods are replaced

with normal goods which includes you know fancy luxury goods

Well inferior goods are goods whose demand decreases when income

rises Right like people want less of that crappy box

Rice and more of the freezer frozen expensive good rice

Normal goods are the opposite Demand increases for them as

income rises Like if we look att coffee in the

McDonald's coffee is an inferior good while Starbucks coffee is

a normal good rights more expensive more lavish more lugs

for getting a ride to work while busing is an

inferior service compared to getting a taxi If anyone drives

those things anymore or anywhere the richer we get the

more we spend in the more we switch out inferior

goods for normal goods For instance you're shopping for toilet

paper Yes we all do Last week's pay raise might

mean you stock up more on toilet paper like never

before using it to line your walls of your house

because well you can mo money mo tp write thie

income effect is then at work or your pay raise

might mean you buy the same amount of toilet paper

as before But you buy the super soft yet super

sturdy gold lined fancy toilet paper with the talcum powder

All in it Yes cream oblique soft to go with

your you know new golden toilet of course because you're

substituting your inferior toilet and toilet paper with a luxury

toilet and toilet paper We're looking at the substitution effect

but hold up Buying a gold toilet in gold lined

toilet paper because you've got a raise also falls under

the income effect umbrella since it's a change in your

consumption caused by a change in your income Yet the

income effect and substitution of facts can both apply to

the same situation So let's take a look at a

price change instead of any income change in this parallel

universe You did not get a raise Let's say the

gold lined toilet paper wasn't selling too well on the

market for some odd reason it kind of itches there

So it went on mega sale In fact the gold

lined toilet paper was cheaper than the toilet paper you

usually buy so you substitute your normal teepee with the

luxury TP Since your income stayed the same Well there's

no income effect to be found here and no gold

toilets Unfortunately this is another example of the substitution effect

at work Your favorite wine is a nice Napa Valley

cab cabernet there that usually retails for fifty bucks a

bottle Unfortunately California's hit by yet another set of wildfires

and half the inventory of your favorite wine is destroyed

prices skyrocket was fifty bucks a bottle Now it's one

hundred more than you're willing to pay for a bottle

of hooch So you switch to two buck chuck until

prices get back to normal So to recap the income

effect is changes in consumption based on changes in your

income More money more buying power which means greater demand

in the consumer market less money less buying power which

means lower demand in the market Whether the quantity or

quality of what you're buying changes doesn't make a whole

lot of difference is just a change in how much

you're spending We're talking about here Well the substitution effect

is when you switch out one good for another whether

from an income change or a price Change more money

or slashed prices while time to trade up less money

or prices than rose Well time to trade down And

then you get laid off from your job and have

to take a gig working at a call centre for

half your previous salary The dark side of the income

effect No more gold lined toilet paper for Gyu Instead

you're stealing TP from the bathroom at McDonald's trade in

that Cadillac you releasing Switch to a line scooter instead

Also no more sushi lunches Instead Gore buying canned tuna

in bulk at Walmart for ninety nine cents a serving

and brown bagging homemade tuna salad sandwiches toe work and

forget the weekly massages at the spa Yeah Instead you're

plunking quarters into the massage chair they have at the

malls here So good luck with that Yeah So those

are income and substitution effects there Yeah Pretty sexy or 00:04:52.519 --> [endTime] not What