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Substitution Effect
- The substitution effect is change in an item's consumption associated with the change in the price of the item, level of utility held constant.
- When the price of item declines, substitution effect leads to an increase in the quantity of item demanded.
Income Effect
- The income effect is change in the consumption of an item brought by increase in purchasing power, with the price of item held constant.
- When income of person increases, the quantity demanded for product can increase or decrease.
- Even with inferior goods, the income effect is sufficiently large to outweigh the substitution effect.
Marginal Product Theory a. What is the MC of output in the short-run? b. What is the MC of labor (employed)? c. What is the short-run profit-maximizing decision
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if a commodity has limited demand , should economist say that we still have a scarcity ?
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