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Transcript of Substitution Effect .
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.)
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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.
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Economics
1 As the price of a commodity falls, consumers move toward it from
relatively more expensive goods (the substitution effect)
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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.
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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
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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.
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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).
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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
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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.
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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.
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Consumer choice - Price effect as 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
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Consumer choice - Price effect as sum of substitution and income effects
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 :
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Consumer choice - Price effect as sum of substitution and income effects
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.
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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.
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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.
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Neutral good
1 This means demand for these goods is perfectly inelastic; the income
effect equals the substitution effect
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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.
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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.
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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
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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.
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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.
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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.
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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
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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.
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Labour economics - Neoclassical microeconomic model mdash; Supply
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)
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Labour economics - Neoclassical microeconomic model mdash; Supply
1 Where it slopes upwards to the left (negative elasticity), the income
effect is greater than the substitution effect
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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
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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)
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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
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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”.
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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.
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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.
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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
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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
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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
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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)
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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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
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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.
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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)
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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.
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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
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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
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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.
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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.
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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'.
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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.
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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'.
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Polygenic trait - Allele shuffling - allele Substitution
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]'.
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Polygenic trait - Allele shuffling - allele Substitution
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.
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Polygenic trait - Allele shuffling - allele Substitution
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
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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.
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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
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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'.
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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
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