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And finance Allah shmoop what our income and substitution effects

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Often people seemed set in their ways buying the same

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coffee at the same price every day taking the same

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bus at the same time every day buying you know

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entertainment magazines every day and so on That is until

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prices change or our pay changes like our salaries which

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makes us then do a double take right Well the

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income effect describes how a change in income changes a

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consumer's demands Getting a pay raise increases purchasing power which

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increases demand for goods and services while taking a pay

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cut will lower purchasing power in consumer demand The substitution

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effect describes how people substitute one good for another when

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either prices income changes or a new rival good arrives

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on the market For both the income in substitution effect

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it's common that as income rises inferior goods are replaced

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with normal goods which includes you know fancy luxury goods

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Well inferior goods are goods whose demand decreases when income

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rises Right like people want less of that crappy box

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Rice and more of the freezer frozen expensive good rice

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Normal goods are the opposite Demand increases for them as

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income rises Like if we look att coffee in the

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McDonald's coffee is an inferior good while Starbucks coffee is

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a normal good rights more expensive more lavish more lugs

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for getting a ride to work while busing is an

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inferior service compared to getting a taxi If anyone drives

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those things anymore or anywhere the richer we get the

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more we spend in the more we switch out inferior

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goods for normal goods For instance you're shopping for toilet

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paper Yes we all do Last week's pay raise might

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mean you stock up more on toilet paper like never

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before using it to line your walls of your house

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because well you can mo money mo tp write thie

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income effect is then at work or your pay raise

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might mean you buy the same amount of toilet paper

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as before But you buy the super soft yet super

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sturdy gold lined fancy toilet paper with the talcum powder

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All in it Yes cream oblique soft to go with

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your you know new golden toilet of course because you're

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substituting your inferior toilet and toilet paper with a luxury

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toilet and toilet paper We're looking at the substitution effect

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but hold up Buying a gold toilet in gold lined

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toilet paper because you've got a raise also falls under

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the income effect umbrella since it's a change in your

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consumption caused by a change in your income Yet the

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income effect and substitution of facts can both apply to

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the same situation So let's take a look at a

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price change instead of any income change in this parallel

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universe You did not get a raise Let's say the

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gold lined toilet paper wasn't selling too well on the

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market for some odd reason it kind of itches there

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So it went on mega sale In fact the gold

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lined toilet paper was cheaper than the toilet paper you

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usually buy so you substitute your normal teepee with the

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luxury TP Since your income stayed the same Well there's

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no income effect to be found here and no gold

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toilets Unfortunately this is another example of the substitution effect

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at work Your favorite wine is a nice Napa Valley

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cab cabernet there that usually retails for fifty bucks a

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bottle Unfortunately California's hit by yet another set of wildfires

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and half the inventory of your favorite wine is destroyed

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prices skyrocket was fifty bucks a bottle Now it's one

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hundred more than you're willing to pay for a bottle

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of hooch So you switch to two buck chuck until

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prices get back to normal So to recap the income

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effect is changes in consumption based on changes in your

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income More money more buying power which means greater demand

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in the consumer market less money less buying power which

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means lower demand in the market Whether the quantity or

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quality of what you're buying changes doesn't make a whole

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lot of difference is just a change in how much

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you're spending We're talking about here Well the substitution effect

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is when you switch out one good for another whether

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from an income change or a price Change more money

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or slashed prices while time to trade up less money

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or prices than rose Well time to trade down And

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then you get laid off from your job and have

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to take a gig working at a call centre for

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half your previous salary The dark side of the income

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effect No more gold lined toilet paper for Gyu Instead

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you're stealing TP from the bathroom at McDonald's trade in

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that Cadillac you releasing Switch to a line scooter instead

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Also no more sushi lunches Instead Gore buying canned tuna

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in bulk at Walmart for ninety nine cents a serving

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and brown bagging homemade tuna salad sandwiches toe work and

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forget the weekly massages at the spa Yeah Instead you're

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plunking quarters into the massage chair they have at the

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malls here So good luck with that Yeah So those

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are income and substitution effects there Yeah Pretty sexy or 00:04:52.519 --> [endTime] not What

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