INCOME AND SUBSTITUTION

EFFECTS

Income Effect The potential increase in the

consumption of both commodities.

Substitution EffectMeasures how much the higher price encourages consumers to use other goods, assuming the same level of income.

0 2 4 6 8 10 120

2

4

6

8

10

12

CI2

I1

Figure 33: Income and Substitution Effects

A

B

Food

Con

sum

ptio

n

Commodity Consumption

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.

UTILITY AND DEMAND

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.

0 1 2 3 40

2

4

6

8

10

12(a)

Figure 35: Consumer Surplus in Monetary Units

Price

Quantity of Demand

D

Price

p

q

oni

Surplus

e

D

Quantity of Demand

i n

Surplus

Marginal Utility

q

p

Quantity of Consumption

e

Figure 36: Consumer Surplus and Utility

on

Surplus

THE PARADOX VALUE

PAUL SAMUELSON

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