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→For Honors Students Only: Giffen Goods: formatting
The “substitution effect” is the change in substitution (one good for another) due to the change in price of one of the two goods. If the price of a good decreases, then that price change makes it more attractive to be used as a substitute for another good. If, for example, chicken sandwiches are on sale at half-price at McDonalds, then more customers are going to choose chicken sandwiches as a substitute for hamburgers. The decrease in price of chicken sandwiches has a “substitution effect” of causing more people to buy them as they move from eating hamburgers to eating the cheaper chicken sandwiches.
The “substitution effect” is the change in substitution (one good for another) due to the change in price of one of the two goods. If the price of a good decreases, then that price change makes it more attractive to be used as a substitute for another good. If, for example, chicken sandwiches are on sale at half-price at McDonalds, then more customers are going to choose chicken sandwiches as a substitute for hamburgers. The decrease in price of chicken sandwiches has a “substitution effect” of causing more people to buy them as they move from eating hamburgers to eating the cheaper chicken sandwiches.
== For Honors Students Only: Giffen Goods ==
=== For Honors Students Only: Giffen Goods ===
Last class, we mentioned an odd type of good known as an “inferior” good. You may recall that the demand for an “inferior” good actually increases when income decreases. Examples are margarine (because people with declining income can less afford butter). Bankruptcy services are “inferior”, because the greater the decline in income, the more people who file for bankruptcy, and the greater the demand for those services.
Last class, we mentioned an odd type of good known as an “inferior” good. You may recall that the demand for an “inferior” good actually increases when income decreases. Examples are margarine (because people with declining income can less afford butter). Bankruptcy services are “inferior”, because the greater the decline in income, the more people who file for bankruptcy, and the greater the demand for those services.