Substitution Effect and Income Effect

The rising cost of gasoline has negatively affected a large portion of the United States population. Unfortunately salaries for many have been steady and have not followed the trends of the rising pricing of goods and services. This has left many American searching for ways to fund their dependency of gasoline. A one hundred percent hike on gasoline prices would be detrimental to many. This paper seeks to discuss the affect such rise in gasoline prices would has on various aspect of my decision making process.

As Thomas and Maurice (2011) stated, Income effect is, “the change in the consumption of a good resulting strictly from a change in purchasing power after the price of a good changes”.This refers to how my spending on a good changes because of a change in the portion of my income that I have available to spend on the good. Substitution effect is defined as “the change in the consumption of a good that would result in the consumer remained on the same indifference curve after the price of the good changed” (Thomas, Maurice p 187). This pertains to how my spending changes because of a change in the relative prices of a good and its substitutes.

Driving Less

My current position as a Para-educator allows me to have the bulk of the summer months off. This would be a life saver in the event that the price of gas rose one hundred percent during the summer. Although I would like to travel at the increased price I would consolidate trips in order to drive less and spend less on gas.

Eating Out

As a result of higher gas prices and the inability to drive as much an income effect would occur when it comes to the frequency of eating out. Although restaurant meals and gasoline are not substitutes my consumption of restaurant meals decreased to zero because I would have no money to spend on it after paying for gasoline.

Vehicle Maintenance

Vehicle maintenance is important to fuel economy as stated on Autozone.com (2012), “A periodic...