substitution effect

• Substitution Effect

https://store.theartofservice.com/the-substitution-effect-toolkit.html

Gun control - Studies, debate, and opinions

1 They also note that, "the absence of significant correlations between gun

ownership and total homicide, assault, or suicide rates...[leaves]

open the question of possible substitution effects." (In other words,

other means could have been substituted for firearms used in the commission of homicide or suicide.)


Labour supply - Dynamics

1 If the substitution effect is stronger than the income effect then the

labour supply curve will be upward sloping; if beyond a certain wage rate the income effect is stronger

than the substitution effect, then the labour supply curve is backward

bending.


Economics

1 As the price of a commodity falls, consumers move toward it from

relatively more expensive goods (the substitution effect)


Risk aversion - Relative risk aversion

1 exhibits constant relative risk aversion with and the elasticity of intertemporal substitution . However, a time varying

relative risk aversion can be considered. When and one is subtracted in the numerator (facilitating the use of

l'Hôpital's rule), this simplifies to the case of log utility, and the income effect and substitution effect on saving exactly

offset.


Scenario planning - Development of scenario analysis in business organizations

1 For example, we can safely make assumptions about demographic shifts and, perhaps, substitution

effects for certain new technologies


Peak oil - Effects of rising oil prices

1 Some economists predict that a substitution effect will spur demand for alternative fuel|alternate energy

sources, such as coal or liquefied natural gas. This substitution can be only temporary, as coal and natural

gas are finite resources as well.


Liquified natural gas - Imports

1 Compared with the crude oil market, the natural gas market is about 60 percent of

the crude oil market (measured on a heat equivalent basis), of which LNG

forms a small but rapidly growing part. Much of this growth is driven by the need

for clean fuel and some substitution effect due to the high price of oil

(primarily in the heating and electricity generation sectors).


Consumer choice

1 The fundamental theorem of demand states that the rate of consumption falls as the price of the good rises; this is called the Substitute good|

substitution effect


Consumer choice - Substitution effect

1 The substitution effect is the effect observed with changes in relative

price of goods. This effect basically affects the movement along the

curve.


Consumer choice - Price effect as sum of substitution and income effects

1 Every price change can be decomposed into an income effect and a substitution effect; the price

effect is the sum of substitution and income effects.



1 If the good is an inferior good, then the income effect will offset in some

degree the substitution effect



1 In the figure, the substitution effect, \Delta y_1^s , is the change in the

amount demanded for \ y when the price of good \ y falls from \ p_1 to \ p_1' (increasing purchasing power for

\ y ) and, at the same time, the money income falls from m to m' to

keep the consumer at the same level of utility on \ I1 :



1 The substitution effect increases the amount demanded of good \ y from \

y_1 to \ y_s . In the example, the income effect of the price fall in \ y_1 partly offsets the substitution effect

as the amount demanded of \ y goes from \ y_s to \ y_2 . Thus, the price effect is the algebraic sum of

the substitution effect and the income effect.


Consumer choice - Labor-leisure tradeoff

1 From this labor-leisure tradeoff model, the substitute good|

substitution effect and Income–consumption curve|income effect

from various changes in price caused by welfare benefits, labor taxation, or

tax credits can be analyzed.


Neutral good

1 In economics, 'neutral goods' are good (economics)|goods whose

demand is independent of income. Such goods have substitution effects

but not income effects.


Neutral good

1 This means demand for these goods is perfectly inelastic; the income

effect equals the substitution effect


Giffen good

1 In economics and consumer theory, a 'Giffen good' is a product that people consume more

of as the price rises—violating the law of demand. Normally, as the price of Goods (economics)|goods rises, the Consumer

theory#Substitution effect|substitution effect makes consumers purchase less of it, and

more of substitute goods. In the Giffen goods situation, the Consumer theory#Income effect|

income effect dominates, leading people to buy more of the goods, even as its price rises.


Giffen good - Analysis

1 If precondition #1 is changed to The goods in question must be so inferior that the income effect is greater than

the substitution effect then this list defines necessary and sufficient conditions. The last condition is a condition on the buyer rather than

the goods itself, and thus the phenomenon is also called a Giffen

behavior.https://store.theartofservice.com/the-substitution-effect-toolkit.html

Giffen good - Analysis

1 Any good where the income effect more than compensates for the

substitution effect is a giffen good.


Rebound effect (conservation)

1 The full rebound effect can be distinguished into three different

economic reactions to technological changes: The direct rebound effect

refers to increases in consumption of a good because of the substitution

effect from lower cost of use


Rebound effect (conservation) - Types of effects

1 # Direct rebound effect: Increased fuel efficiency lowers the cost of

consumption, and hence increases the consumption of that good

because of the substitution effect.


Rebound effect (conservation) - Direct and indirect effects

1 A parallel effect will happen for cost saving efficient technologies for

producers, where output and substitution effects will occur.


Veblen good - Related concepts

1 The interaction effects are a different kind of anomaly from that posed by

Giffen goods. The Giffen goods theory is one for which observed

demand rises as price rises, but the effect arises without any interaction

between price and preference—it results from the interplay of the

income effect and the substitution effect of a change in price.


List of publications in economics - Value and Capital

1 'Importance:' The book built on ordinal utility and mainstreamed the

now-standard distinction between the substitution effect and the

income effect for an individual in Consumer theory|demand theory in

the 2-good case


Labour economics - Neoclassical microeconomic model mdash; Supply

1 To understand what effect this might have on the decision of how many

hours to work, you must look at the income effect and substitution effect.



1 In some cases the substitution effect is greater than the income effect (in

which case more time will be allocated to working), but in other

cases the income effect will be greater than the substitution effect (in which case less time is allocated

to working)



1 Where it slopes upwards to the left (negative elasticity), the income

effect is greater than the substitution effect


Social Security (United States) - Saving behavior

1 The wealth 'Substitution effect#Substitution effect|

substitution effect' occurs when a person saving for retirement

recognizes that the Social Security system will take care of him and decreases his expectations about how much he needs to personally

save


Capital structure - Agency Costs

1 * 'Asset substitution effect': As D/E increases, management has an increased

incentive to undertake risky (even negative Net present value|NPV) projects. This is

because if the project is successful, share holders get all the upside, whereas if it is

unsuccessful, debt holders get all the downside. If the projects are undertaken, there is a chance of firm value decreasing and a wealth transfer from debt holders to

share holders.https://store.theartofservice.com/the-substitution-effect-toolkit.html

Indifference curve - Examples of indifference curves

1 The substitution effect is reinforced through the income effect of lower

real income (Beattie-LaFrance)


Keynesian economics - Excessive saving

1 First, saving does not fall much as interest rates fall, since the income

effect|income and substitution effects of falling rates go in

conflicting directions


Real Business Cycle theory - Stylized facts

1 However, given the pro-cyclical nature of labor, it seems that the

above “substitution effect” dominates this “income effect”.


Intertemporal choice - Fisher's Model of Intertemporal Consumption

1 Now, let us consider a scenario where the interest rates are increased. If the consumer

is a net saver, he will save more in the current period due to the substitution effect and consume more in the current period due

to the income effect. The net effect thus, becomes ambiguous. If the consumer is a net borrower, however, he will tend to consume

less in the current period due to the substitution effect and income effect thereby

reducing his overall current consumption.


Deadweight loss - Hicks vs. Marshall

1 However, Hicks analyzed the situation through indifference curves

and noted that when the Alfred Marshall|Marshallian Demand Curve

exhibits perfect inelasticity, the policy or economic situation which

caused a distortion in relative prices will have a substitution effect and

that this substitution effect is a deadweight loss.


Deadweight loss - Hicks vs. Marshall

1 This difference is attributable to the behavioural changes induced by a

distortionary tax that are measured by a substitution effect


Lump of labor fallacy - Economic analysis

1 The substitution effect considers the consequences on employment given

the output level, the scale effect considers the consequence on

employment of the change in the costs of production by way of the

effect of the latter on the production level


Lump of labor fallacy - Economic analysis

1 But if wages are reduced to the extent to compensate for the

consequences of the reduced labour time on the costs of production, the

scale effect can be neutralized leaving only the substitution effect to

operate


Economic theory - Supply and demand

1 As the price of a commodity falls, consumers move toward it from

relatively more expensive goods (the substitution effect)


Oil price increases since 2003 - Alternative fuels

1 Economists say that the consumer theory#Substitution effect|

substitution effect will spur demand for alternative fuel|alternate fossil

fuels, such as coal or liquefied natural gas and for renewable

energies, such as solar energy|solar power, wind power, and biofuel|

advanced biofuels.


Regressive tax

1 To measure the effect, the income elasticity of demand|income

elasticity of the good being taxed as well as the Income–consumption curve|income substitution effect

must be considered.


Backward bending supply curve of labour

1 Such a comparison generally means that a higher wage entices people to

spend more time working for pay; this substitution effect implies a

positively sloped labor supply curve


Backward bending supply curve of labour - Overview

1 Since a rising wage rate raises incomes, all else constant, the

attraction of non-paid time rises, eventually cancelling out the

substitution effect and implying the backward bend


Backward bending supply curve of labour - Overview

1 This is because the strength of the income effect now exceeds that of the substitution effect: the utility to

be gained from an extra hour of non-paid time is now greater than the

utility to be gained from extra income that could be earned by

working the extra hour


Backward bending supply curve of labour - A Caveat

1 Higher pay for overtime hours can reduce or negate the effect of a backward bending labour supply curve, by increasing wages only for hours worked beyond a certain

amount. Overtime maintains the substitution effect at high labour supply, but the income effect from wages increasing on all previous

hours worked is eliminated. Thus higher hourly overtime pay can cause workers to

work more hours than they would if the higher rate was paid on all hours.


Luxury tax

1 A luxury good may be a Veblen good, which is a type of good for which

demand increases as price increases. Therefore the effect of a luxury tax

may be to increase demand for certain luxury goods. In general,

however, since a luxury good has a high income elasticity of demand by

definition, both the income effect and substitution effect will decrease demand sharply as the tax rises.


Marginal propensity to consume

1 The MPC is not strongly influenced by interest rates; consumption tends to

be stable relative to income. In theory one might think that higher interest rates would induce more

saving (the substitution effect) but higher interest rates also mean than people do not have to save as much

for the future.


Wealth elasticity of demand - Definition

1 This is analogous to the definition of the income effect from the income

elasticity of demand, or the substitution effect from the price

elasticity


Added worker effect - Relation to income and substitution effects

1 The added worker effect results when the income effect dominates the

substitution effect in an individual's decision whether or not to participate

in the labor market. Specifically, in the added worker effect married

women increase their labor supplied as a response to a loss of real income despite the price of leisure dropping

in relation to the wage rate. The income and substitution effects are important concepts in the consumer

choice theory of microeconomics.


Added worker effect - Relation to income and substitution effects

1 For added workers to enter the labor market when earning power

decreases, the negative income effect must outweigh the positive substitution effect (Mincer, p.68)


Income effect

1 The effect of the former type of change in available income is

depicted by the income-consumption curve discussed in the remainder of this article, while the effect of the freeing-up of existing income by a

price drop is discussed along with its companion effect, the substitution effect, in the article on the latter.


John Hicks - Contributions to economic analysis

1 The book built on ordinal utility and mainstreamed the now-standard

distinction between the substitution effect and the income effect for an

individual in Consumer theory|demand theory for the 2-good case


Ceteris paribus - Two uses

1 An example would be the hypothetical separation of the

income effect and the substitution effect of a price change, which

actually go together


Economic impact of HIV/AIDS - Effect on taxable population

1 On the level of the household, AIDS results in both the loss of income and increased

spending on healthcare by the household. The income effects of this lead to spending

reduction as well as a substitution effect away from education and towards

healthcare and funeral spending. A study in Côte d'Ivoire showed that households with

an HIV/AIDS patient spent twice as much on medical expenses as other households.


Substitution effect

1 In economics and particularly in consumer choice theory, the

'substitution effect' is one component of the effect of a change in the price of a good upon the amount of that

good demanded by a consumer, the other being the income effect.


Substitution effect

1 The effect of the relative price change is called the 'substitution

effect', while the effect due to income having been freed up is

called the 'income effect'.


Substitution effect

1 The same concepts also apply if the price of one good goes up instead of

down, with the substitution effect reflecting the change in relative

prices and the income effect reflecting the fact the income has

been soaked up into additional spending on the retained units of the

now-pricier good.


Substitution effect - Graphical analysis

1 But the move from A to C can be decomposed into two parts. The 'substitution effect' is the change that would occur if the consumer were required to remain on the

original indifference curve; this is the move from A to B. The income effect is the simultaneous move from B to C that occurs because the lower price of one good in fact allows movement

to a higher indifference curve.https://store.theartofservice.com/the-substitution-effect-toolkit.html

Polygenic trait - Allele shuffling - allele Substitution

1 After some algebraic simplification, this becomes 'α A = q [a + (q-p)d]' -

the 'substitution effect' of 'A'.



1 A parallel reasoning can be applied to the lower part of the diagram,

taking care with the differences in frequencies and gene effects. The result is the 'substitution effect' of 'a', which is 'α a = -p [a + (q-p)d]'.



1 The common factor inside the brackets is known as the 'average allele substitution effect', and is

usually given as 'α = a + (q-p)d'. It can be derived also in a more direct

way, but the result is the same.



1 In subsequent sections, these 'substitution effects' will be used to

define the gene-model genotypes as consisting of a partition predicted by

these new effects (substitution expectations), and a deviation

between these expectations and the previous gene-model effect


Polygenic trait - Gene effects redefined

1 The gene-model effects ('a', 'd' and '-a') are important soon in the

derivation of the deviations from substitution expectations ('δ'), which were first discussed in the previous

Allele Substitution section. However, they need to be redefined

themselves before they become useful in that exercise. They firstly

need to be re-centralized around the population mean ('G'), and secondly

they need to be re-arranged as functions of 'α', the average allele

substitution effect.


Polygenic trait - Gene effects redefined

1 These expectations each are a function of the average allele

substitution effect, and the present re-centralized effects have to be re-

arranged still further to accommodate this last subtraction


Polygenic trait - Genotype substitution - Expectations and Deviations

1 The zygote genotypes are the target of all this preparation. The homozygous genotype 'AA' is a union of two 'substitution effects of

A', one coming from each sex. Its 'substitution expectation' is therefore 'αAA =

2αA = 2qα' (see previous sections). Similarly, the substitution expectation of 'Aa'

is 'αAa = αA + αa = (q-p)α' ; and for 'aa', 'αaa = 2αa = -2pα'. These 'substitution

expectations' of the genotypes are known also as 'Breeding values'.


Polygenic trait - Genotypic variance

1 There are two major approaches to defining and partitioning the

'Genotypic variance' : one is based on the 'gene-model effects', while

the other is based on the 'genotype substitution effects' They are

algebraically inter-convertible with each other


For More Information, Visit:

• https://store.theartofservice.com/the-substitution-effect-toolkit.html

The Art of Servicehttps://store.theartofservice.com






substitution effect

Documents

sum of substitution

choice price effect

natural gas market

high price of oil

relative price of goods

crude oil market

liquefied natural gas

labour supply curve