SUBSTITUTION EFFECT/Next/Next
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Activity |
| This activity involves viewing of few cartoons, graphics and vedios on price rise in India, in the year 2011. This exercise will help you understand the impact of price rise on consumer's demand behaviour. | |
| The case studies that are discussed here suggest how understanding the impact of relative price change on consumption is important in economic analysis.
(1) Rising Demand for Diesel Cars in India The widening price gap between the petrol and diesel fuels, in the year 2011, has forced a number of Indian car buyers to shift towards diesel run cars. Several car manufacturers are shifting from manufacturing of petrol run cars to diesel run cars. We now discuss two case studies that are related to the worldwide food price hike since 2007-08. These case studies enable us to understand how important it is to analyze consumer’s demand preferences under substitution effect. (2)Consequences of Food Price Hike The most visible consequence of a large increase in food prices was changing consumption pattern from nutritional food to low nutrition based food for the vulnerable families. For further details refer Further, in the absence of effective protective policies; the situation is likely to decrease schooling rates, health expenditure, and increase child labour, as the need to purchase food at higher prices overwhelms the need to spend on non-food items. (3) Food Subsidy and the Preference for Less-Nutritional Food This study reports consumers’ preference for less-nutritional food despite provision of adequate subsidies and their proper implementation. The study is based on author’s field study in two Chinese districts. For further details refer |
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Key Terms |
Substitution Effect represents consumer's movement on her/his indifference map from one optimal consumption combination to another as a result of change in relative price alone, real income of the consumer remaining unchanged.
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Results |
- People respond to relative price changes in order to maximize the utility of spendable income. The substitution effect represents changes in optimal consumption combination on account of changes in relative prices of goods.
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Further Readings |
(1) Essays in Honour of Malcolm Sawyer Edited by Philip Arestis
(2) Visit Amazon's Dominick Salvatore Page
(3) Bradley R. Schiller (2011)The Micro Economy Today (11Edition) Tata McGraw-Hill
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