Answer to Question #202242 in Microeconomics for Nii-Amo Justice

Question

With the aid of a diagram analyze the income, substitution and total effect of a price

change on the following type of goods.

a. Normal goods

b. Inferior goods

c. Giffen goods

Answer 1

the above graph shows the substitution and income effect of a normal good is positive and increases the quantity consumed of a commodity with a fallen price causing a shift of the curve to the right. income effect is positive and quantity demanded in normal goods is inverse with price.

the above graph shows the substitution and income effect of an inferior good. Inferior goods have a negative income effect compared to normal goods.If income alone was considered this would lead to a decrease in demand of goods. since substitution effect is also always present this causes an increase in demand of the goods and hence there is a shift in equilibrium to the right.

the above figure shows the substitution effect and income effect of giffen goods where the income effect outweighs the substitution effect. And as the income effect is negative it therefore dominates the substitution effect causing a decrease in demand of goods with fallen prices.