The income-compensated demand curve illustrates the change in quantity
demanded when relative prices change, holding real income constant. This
isolates the substitution effect and, I feel helps the students to
understand the difference between real and nominal income. The benefit is
admittedly small.
The reason I always cover i. and s. effects is that it gives the students a
much better understanding of what causes the demand curve to slope downward.
Both effects are important. Without the distinction of both income and
subs. effects, what is the explanation for downward sloping demand? It is
probably based upon the substation effect alone. If this is the case, then
there would be no discussion of the income effect. The income effect merely
supports the subs. effect except for inferior goods, and for inferior goods,
the income effect is relatively small. So maybe the income effect is not
important...
Of course there are at least two important macro policy discussions which
rely heavily on the income effect: the demand for leisure (the effects on
labor supply), and the demand for bonds (the effect on the supply of
savings). In both cases, the income effect may swamp the substitution
effect at some point.
Lee
-Original Message-
From: Alex T Tabarrok [mailto:[EMAIL PROTECTED]]
Sent: Wednesday, February 12, 2003 9:34 AM
To: [EMAIL PROTECTED]
Subject: Re: income and substitution effect
So far we have that i. and s. effects are useful to
a) teach Marshallian demand
b) teach difference between nominal and real income
c) students going on to graduate school
d) useful but for reasons that can't be remembered! :)
e) useful as a hurdle/signal
f) not useful at the intermediate/mba level
Regarding Marshallian demand this is true but just raises the
question what is the use of Marshallian demand at an intermediate level?
(Note almost all textbooks discuss i. and s. effects but most do not
teach M. demand.) As I said in my post, for welfare analysis, income
and substitution effects become important but this is not taught at the
I. level.
I don't see how i. and s. effects teach nominal and real income but
am willing to be enlightened.
c) is possible but it means that teaching i. and s. effects is a
waste for most students.
Surely there are enough useful things to teach that are also difficult?
thus i. and s. effects is not needed for the hurdle.
Thus the bulk of the posts, and a number I have received offlist,
increase in my mind the hypothesis that this material is a waste of time
(relative to other things that could be taught).
Alex
--
Alexander Tabarrok
Department of Economics, MSN 1D3
George Mason University
Fairfax, VA, 22030
Tel. 703-993-2314
Web Page: http://mason.gmu.edu/~atabarro/
and
Director of Research
The Independent Institute
100 Swan Way
Oakland, CA, 94621
Tel. 510-632-1366
