Economics Assignment Solved (Doc)

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University of Birmingham

Added on 2020-04-21

Economics Assignment Solved (Doc)

University of Birmingham

Added on 2020-04-21

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Running head: ECONOMICS ASSIGNMENT Economics AssignmentName of the StudentName of the UniversityAuthor Note

1ECONOMICS ASSIGNMENT Introduction The indifference curve can be defined as the curve showing all the combinations of twocommodities, which give the same level of utility or satisfaction to the consumer, in a two-commodity economy. The budget line, on the other hand, shows the consumer’s ability to buydifferent combinations of two commodities. The equilibrium occurs at the point, where theindifference curve of a consumer touches his budget line. In this essay, using this approach theeffects of a change in price of coffee, on the quantity demanded of coffee and pastries, by aparticular consumer, is tried to be analyzed, assuming that both the commodities are normalgoods (Rader, 2014). Effects of increase in the price of coffee In the given problem, it is assumed that the consumer spends his entire income on theconsumption of coffee and pastries, both of which are normal goods, which mean with theincrease in price the demand for these commodities decrease and vice versa. When there is aconsiderable increase in the price of coffee, the effect of the increase in price on the quantitydemanded of both the goods can be divided into two parts, the income effect and the substitutioneffect (Rios, McConnell & Brue, 2013). The income effect shows the change in consumption of the consumer due to an increasein the price of a commodity, which decreases the purchasing power of the consumer. On theother hand the substitution effect shows the change in the consumption of the commodities thathappens due to the change in the relative prices of the two commodities following the hike in theprice of one commodity. In the concerned case, coffee being a normal commodity, with the

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