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Essay / Research Paper Abstract
A 5 page paper that begins with an explanation of what the income effect and substitution effect are. The writer addresses these concepts in terms of increased gasoline prices. Seven graphs are incorporated into the page count. Bibliography lists 3 sources.
Page Count:
5 pages (~225 words per page)
File: ME12_PGiese10.rtf
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Unformatted sample text from the term paper:
income is the same. Given the same income, then, purchasing power changes in line with the price of items. Given the same prices for the goods, purchasing power will increase
or decrease as the consumers income increases or decreases (Investopedia, 2009). This is known as the income effect. The income effect is positive in that when an individuals income increases,
he has more purchasing power and will demand more goods (Investopedia, 2009). Consumers may change what they purchase based on prices. If the price of a steak increases, the consumer
may purchase hamburger (Spark Notes, 2009). If the price of steak decreases, the consumer is likely to buy fewer hamburgers and more steak (Spark Notes, 2009). The consumer substitutes one
for the other based on the price. When considering both the income effect and the substitution effect, it becomes confusing as to which is doing what. The income effect
would suggest that if the price of steak increased, consumers would decrease their purchases of steak but the substitution effect suggests that the consumer would switch to another item, such
as hamburgers. Even so, it would seem that the substitution effect is stronger than the income effect (Spark Notes, 2009). Increases in gasoline prices causes numerous problems for consumers. This
even is especially challenging for workers who drive to work and who do not have a good public transportation system available. This consumer drives an average of 2,000 miles
each month. The vehicle gets 20 miles per gallon of gasoline which means the consumer uses 100 gallons of gasoline each month. At a price of $2.60 per gallon, the
consumers monthly bill is $260. If gas prices increase 100 percent, the consumer is now faced with a monthly bill of $520 and if this continues through the three summer
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