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Perfect substitutes have a linear utility function and a constant marginal rate of substitution, see figure 3. [7] If goods X and Y are perfect substitutes, any different consumption bundle will result in the consumer obtaining the same utility level for all the points on the indifference curve (utility function). [8]
The concept of the elasticity of substitution was developed by two different economists, each with their own focus. One of these economists was John Hicks, who defined elasticity of substitution as the change in percentage in the relative number of factors of production used, given a particular change in percentage in relative prices or marginal products.
Under the standard assumption of neoclassical economics that goods and services are continuously divisible, the marginal rates of substitution will be the same regardless of the direction of exchange, and will correspond to the slope of an indifference curve (more precisely, to the slope multiplied by −1) passing through the consumption bundle in question, at that point: mathematically, it ...
Cross elasticity of demand of product B with respect to product A (η BA): = / / = > implies two goods are substitutes.Consumers purchase more B when the price of A increases. Example: the cross elasticity of demand of butter with respect to margarine is 0.81, so 1% increase in the price of margarine will increase the demand for butter by 0.81
Constant elasticity of substitution (CES) is a common specification of many production functions and utility functions in neoclassical economics. CES holds that the ability to substitute one input factor with another (for example labour with capital) to maintain the same level of production stays constant over different production levels.
In economics, gross substitutes (GS) is a class of utility functions on indivisible goods.An agent is said to have a GS valuation if, whenever the prices of some items increase and the prices of other items remain constant, the agent's demand for the items whose price remain constant weakly increases.
The days of 99 cents egg cartons are probably gone for good, but grocery shoppers never expected the average price of eggs to rise to over $7 per dozen as it has in recent weeks.
In auction theory and competitive equilibrium theory, a valuation function is said to have the gross substitutes (GS) property if for all pairs of commodities: () (). I.e., the definition includes both substitute goods and independent goods , and only rules out complementary goods .