Substitution and Income Effects Paper

Topics: Consumer theory, Indifference curve, Utility Pages: 4 (1155 words) Published: August 15, 2012

Consumer Behavior is how consumers allocate their money incomes among goods and services. Each consumer has preferences for certain of the goods and services that are available in the market. Buyers also have a good idea of how much marginal utility they will get from successive units of the various products they might purchase. However, the amount of marginal & total utility that the people will get will be different for every individual in the group because all individuals have different taste and preferences. According to Maurice & Thomas (2011) “marginal utility is an additional or incremental utility. Marginal utility is defined as the change in the total utility that results from unit one unit change in consumption of the commodity within a given period of time”(p. 169).

There is an assumption that consumers engage in rational behavior. Therefore one can define a consumer as a rational person, who tries to use his or her money income to derive the greatest amount of satisfaction, or utility, from it. Consumers want to get the most for their money or, to maximize their total utility. Rational behavior also requires that a consumer not spend too much money irrationally by buying tons of items and stock piling them for the future, or starve themselves by buying no food at all.

Substitution and Income

The income effect describes how consumers react to an increase in purchasing power. For example, if the price of a good they normally buy falls, it leaves them with more money to buy other things. The substitution effect describes how consumers reallocate consumption of goods in response to changes in relative prices. So if the price of apples increases, a consumer might want more oranges, which seem more appealing now in light of the increased cost of apples.

Droving less and purchasing less gasoline

In this case we are just talking about one good, gasoline. It became costlier and hence we purchased less gas and travelled less. This...
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