Applicability Of Income Theory And Substitution Theory In Real Life

Are you an economics student who face problems in understanding income and substitution theory? Or you are a student who knows what are these but is not able to apply them in real life? Well, Online Assignment Expert is a platform that has answers for both of the categories!

Our economics assignment help experts would not only help you understand these theories in a better way, but also relate these with real life examples, so as to clarify the concepts a little better.

So let us begin.

Income Theory V/S Substitution Theory

As the scope of economics is huge, we would just be able to give you a brief about these theories in this short blog. However, you can get an access to a wide world of our reference samples and assessment solutions on our website.

But first, let us see what are these theories.

Income Theory

Keynes, a well known economist was the last person to have made improvisations to the income theory. He believed that it is not the change in money supply, but the change in income that all together affects the aggregate demand. Thus, income is directly proportional to the aggregate demand for goods and services.

Our economic assignment help experts believe that when people have more money, they spend more. As a result, the level in the prices of the commodity also increases. On the contrary, the decrease in the income results in the decline in the aggregate demand as well.

Further, the income theory also says that the changes in the level of the prices is dependent upon the overall expenditure volume. Interestingly, the volume of expenditure depends on the income change.

So, there can be 2 methods to study income theory, which are as follows:

Income-Expenditure Approach

According to the experts of our economics assignment writing services,

Total income(Y)=P(General level of prices)*O(volume of goods and services produced)

P=Y/O which means that prices would be a ratio of money and output. So, you can clearly see when money increases, prices would also increase. On the contrary, when output increases, the money would decrease.

Saving-Investment Approach

According to our economics assignment help experts, the other type of approach which can be used to study the income theory is the saving-investment approach. However, both the approaches are same.

This approach says,

S=Y-C, where S is the saving, Y-C is the income over consumption which is equal to I(income).

In other words, S=I

After we are thorough with the two approaches to study the income theory, now, we shift our focus to the substitution theory.

Substitution Theory

The substitution theory gives the result of the consumption pattern as a result of change in the relative prices of goods. Too hard to understand? Our economics assignment help experts will simplify it for you with the help of an example given below.

Consider a situation where private universities increase their total admission fees by 25%, whereas public universities only by 20%, then it is obvious that we would get to see a shift of the total attendance from private to public universities, isn’t it? This can also be seen in various products such as Pepsi V/S coke, and various other brands.

Now that you are clear with both income as well as substitution theories, why not look into our economics blog section to know more about the topics which we have guided students on?

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