Income and Substitution Effects: Hicks Decomposition

[@pedrocolangelo5844]

Do not worry about "having too much information" on the diagram, you explain so clearly that it wasn't even a problem to us! Thank you so much for posting it!

[@panagiotisvryonis1439]

At 3:05 if u increase r, the denominator of [Y/(1 +r)] gets bigger and the whole figure gets smaller, not bigger, so PV(Y) goes down.

[@02vLxcZF]

I agree that this statement is confusing. Y2 goes up because you get more money from your savings due to an increase in r. I'm not even sure that makes PV(Y2) go up to be honest, given that it is discounted by a higher r.

[@R-Ash_]

If you assumed C*1 and C*2 are the optimal points (In an open economy, you would lend your initial endowments (period 1, Y1>Y2) to increase your lifetime utility), then you would make C1=Y1 and C2=Y2 (adjust the initial points), That being said, you should flip the C1* and C1**, other than that, you did a great job and explained fantastically! Kudo to you!

[@arjunsingha703]

Thanks . It clears my confusion now

[@luisraguzzoni5409]

Thanks for sharing knowledge. You're the GOAT

[@dannytwomey9071]

If the substitution effect is generally the same for both savers and borrowers, then can we expect to see in a scenario in which the substitution effect dominates as being either simply less consumption in period 1 and more in period two without the additional consumption in period one from the income effect regardless of saver/borrower?

[@johnybravo3566]

Many thanks for this, very helpful!

[@jemimaoyedepo2389]

How do you get the income and substitution effect for a borrower then?

[@aziahabdshakur]

Thank you for the explanation! it helps a lot!

[@EverythingEcon]

Thanks! Glad it was useful

[@R-Ash_]

Also, there is a third effect due to a fall in the discounted value of the economy (aka representative household) endowments (Y1+Y2/(1+r)). This pushes towards choosing less of both C1 and C2 and, thus, more savings.

[@tomasskonstantinovs2979]

How can we know that the new optimal choice of the BC2 was in between Y1 and C1? It could also be lower than C1 or higher than Y1 right?

[@hadins1406]

please help, been wondering the same thing lol

[@kikoferras7369]

THANK YOU SO MUCH

[@jordan0893]

king bro

[@oliveranwyl-davies3509]

So I’ve been trying to figure this out if the saver decreases savings it just means that the second Idiff curve is closer to endowment point and the income effect for period 2 is negative

[@EverythingEcon]

I wouldn't think of it as 'decreases savings'. The point is more that they increase consumption in period 1 (this is the same thing but makes more sense intuitively). For a saver, the income effect is positive in both periods if the interest rate increases. This is because they earn more on their savings, so income effectively increases. I hope this helps, but let me know if this doesn't answer your question.

[@oliveranwyl-davies3509]

@@EverythingEcon kind of I fully understand what you are saving but this question I’m doing says that the saver has decided to decrease savings after an increase in interest rates so I moved the 2nd curve closer to endowment point to reflect a decrease in savings would the income effect for period 2 still be positive in this scenario or would it be negative

[@EverythingEcon]

@@oliveranwyl-davies3509 Ah I see. Yes the income effect is still positive due to interest rates increasing.

[@oliveranwyl-davies3509]

@@EverythingEcon perfect thank you so much

[@cartilo2619]

legend

[@jacksonjr.11]

I can hardly hear anything, the video sound is so low

[@abhinavii4580]

thats ur problem its fine for everyone else

[@jacksonjr.11]

@@abhinavii4580 you can’t speak for everyone so stfu