Income and Substitution Effects Substitution Term Paper

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Coping strategy four: Taking public transportation

Taking public transportation will have a more significant income effect than simply trying to drive less or foregoing vehicle maintenance. This will enable the individual to 'opt out' of the increased gas prices. This will enable him or her to spend more money on goods and services, but given the fact that other prices are often affected by gas prices, the prices overall in the economy could be higher. The costs of a bus, train, or subway pass would have to be figured in as well, as well as the opportunity cost of being late to work, if the public transportation system is not reliable. However, if the time spent commuting enables the worker to 'get started' on his or her work on the train or bus, this could result in higher levels of productivity and real income. An additional bonus at work would thus give the individual 'more' income as a result.

Coping strategy five: Buying a bicycle

Buying a bicycle as a lower-cost substitution would have a similar effect upon the availability of income. Riding a bicycle does not require gasoline to operate, meaning that the rider has more money to spend on other goods and services. Once again, however, the bike rider must subtract the cost of buying the bicycle and maintaining it from the total 'money saved' by not using a car. Also, if a bike, rather than a car is used at all times, this means that the bike rider must have other means of transportation for longer distances, or in severe, inclimite weather. It is a substitution, but not a perfect substitution for a car, although it has other potential 'substitution' value of time and money: versus working out at a gym, for example.

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It could enable other budget costs to be made -- forging an expensive gym membership, for example. But in contrast to a commuter via public transport, a bike rider may have an 'opportunity cost' on his or her job because he or she cannot do work and must spend more time commuting than working. And finally, like a commuter, a biker must have access to such a substitute good. In some areas of the country, there is no public transportation, and weather and poor urban planning make biking impossible.

Coping strategy six: Not taking a vacation

Going on a 'stay-cation' rather than a vacation is another example of the 'latte effect.' If gas prices go up, and an individual does not have other means of transport, luxuries rather than necessities must be cut from the budget, now that the individual's disposable income has been reduced. Eliminating a vacation from the budget is a good example of this. A vacation is not a necessity, and if fuel costs are increased across the nation, transportation via car or plane is often also more costly, no matter where one lives.

Coping strategy seven: Buying fewer clothes and making do with more around the home

Eliminating unnecessary purchases is another example of the reduced income effect and the effects of high gas prices. Higher gas prices also often means higher prices of goods such as clothing, because of transportation costs. Even construction prices increase, because of the cost of input costs such as fuel for transport, thus 'making do' and not engaging in major home improvement projects is another example of the income effect......

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