PRICE EFFECT

 MICROECONOMICS
The price effect represents change in consumer’s optimal consumption combination on account of change in the price of a good and thereby changes in quantity purchased, price of another good and consumer’s income remaining unchanged. The consumer is better-off when optimal consumption combination is located on a higher indifference curve and vice versa. In the words of Lipsey," The price effect shows how much satisfaction of the consumer varies due to the change in the consumption of two goods, as the price of one changes, the price of the other and money income remains constant." []

Understand that a consumer's responses to a price change differ depending upon the nature of a good, viz. a normal good, inferior good or a neutral good. Accordingly we have different types of price effects such as positive, negative and zero price effects. These types of price effect corresponding to consumer's responses for different nature of goods are summarized in chart.1:

CHART.1 TYPE OF PRICE EFFECTS Thus, a price effect is positive in case of normal goods. There is an inverse relationship between price and quantity demanded. It is negative in case of inferior goods (including Giffen goods) where we find a direct relationship between price and quantity demanded. Finally, price effect is zero in case of neutral goods where consumer's quantity demanded is fixed.

Solve the following activity. We then move on to understand positive, negative and zero price effects with the help of indifference curves.

In the following subsections we discuss positive, negative and zero price effects with the help of indifference curves.

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