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AP Economics Mr. Bernstein Module 46 (pp 457-460 only): Income and Substitution Effects October 7, 2013.

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Presentation on theme: "AP Economics Mr. Bernstein Module 46 (pp 457-460 only): Income and Substitution Effects October 7, 2013."— Presentation transcript:

1 AP Economics Mr. Bernstein Module 46 (pp only): Income and Substitution Effects October 7, 2013

2 AP Economics Mr. Bernstein Law of Demand All other things equal, as price increases the quantity demanded falls So there is an inverse relationship between price and quantity demanded Plotted on a graph, the law of demand infers a downward sloping demand curve Why? 2

3 AP Economics Mr. Bernstein The Substitution Effect The downward sloping demand curve and opportunity costs Costs: Driving into city = $20; bus ticket = $10 The opportunity cost of driving = 2 bus tickets If the price of bus tickets rise to $15, the opportunity cost of driving a car decreases to 1.33 bus tickets Driving becomes relatively cheaper and the quantity demanded rises 3

4 AP Economics Mr. Bernstein The Substitution Effect The downward sloping demand curve and opportunity costs Costs: Driving into city = $20; bus ticket = $10 The opportunity cost of driving = 2 bus tickets If the price of bus tickets falls to $5, the opportunity cost of driving a car increases to 4 bus tickets Driving becomes relatively more expensive and the quantity demanded falls 4

5 AP Economics Mr. Bernstein The Income Effect Changes in real income Primarily effects major purchases New job, higher income = nicer car Lose job, lose income = less nice car Income not keeping up with inflation = lower real income = less nice car Reinforces Substitution Effects Causes Demand Curve to slope downward 5


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