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
