What are the income and institutions effect of a rise in price of a
normal good, illustrate and explain.

Criteria 
- all answers must be complete and length 600 - 700 words per
question
- the assumptions upon which the analysis is based must be stated at
the outset.
- Sources must be acknowledged and a list of references provided.

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Request for Question Clarification by livioflores-ga on 02 Apr 2003 21:00 PST

Hi tom123!!

I am working on your questions and I think that I can answer one or
two per day, let me know if it is good for you, and wich questions do
you prefer to have answered first.

In regards to this question I nthink that there is a typo and you can
ask the following question:
"What are the income and substitutions effect of a rise in price of a
normal good, illustrate and explain."
and not:
"What are the income and institutions..."

I will wait for your clarification.

Regards.
livioflores-ga

When the factory price increases by 10%, middle men typically increase
their price by about 10%, and the retail price increases also by about
10%. Everyone's profit increases by 10% unless some customer's delay
purchase because of the high price. Where the customer has alternate
items to purchase the sales can drop sharply resulting in decreased
profit for all or most of the institutions. Handling less product will
tyically mean a freeze on new hires for all or most of the
institutions and over time will be less often allowed.  Sales tax (
Social Security, withholding, excise, VAT = value added tax) receipts
on this item can also drop. Neil

A summary of the income and substitution effects in microeconomic
household theory is given at
http://www.econ.iastate.edu/classes/econ101/hallam/Income_Substitution.pdf

With the search 'income substitution effects', you should be able
quickly to identify additional sources.

The usual axiomatic assumptions on consumers' preferences are
completeness (unlimited domain), reflexivity (bundle A: A>=A), and
transitivity (bundles A, B, C: A>=B and B>=C => A>=C). Furthermore,
monotonicity (more is better), local non-satiation (there is always a
"direction" moving into which one implies higher utility), and
convexity (average consumption bundles prefered to extreme ones).

Every microeconomics textbook will be able to answer your question in
more detail. My recommendation is "Intermediate Microeconomics" by
Varian, which doesn't require any previous knowledge of economics, and
only simple grammar school maths.

It is however of utmost importance to be aware of the limitations of
such a  mickey mouse level theory, which doesn't cover intertemporal
optimisation, uncertainty, information, and many other important
aspects.

On a higher level, I recommend "Advanced Microeconomic Theory" by
Jehle and Reny (modern, with a good mathematical appendix),
"Microeconomic Analysis" by Varian (a bit old-fashioned and a bit too
short to be self-contained), or "Microeconomic Theory" by Mas-Colell,
Whinston, and Green (the "bible").

Best,
-David

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