Income and substitution effects

2. Income Effect
The potential increase in the
consumption of both commodities.
Substitution Effect
Measures how much the higher price
encourages consumers to use other
goods, assuming the same level of
income.

3. 0
2
4
6
8
10
12
0 2 4 6 8 10 12
C
I2
I1
A
B
FoodConsumption
Commodity Consumption

4. Derivation of the Demand Curve
There is a potential consumption for a certain
commodity item given its market price and the
income of its potential consumers.

5. CONSUMER SURPLUS
The peso value that the consumer pays for
a certain volume of a commodity is less than the
peso value of the benefit from its consumption.

6. 0
2
4
6
8
10
12
0 1 2 3 4
(a)
Price
Quantity of Demand
D

7. Price
p
q
o
ni
Surplus
e
D
Quantity of Demand

8. i n
Surplus
Marginal
Utility
q
p
Quantity of Consumption
e
o
n
Surplus

9. PAUL SAMUELSON
“ The total utility of water does not determine
its price or demand.”