Income Effect Price Effect And Substitution Effect

Income effect and substitution effect are the components of price effect i e.

Income effect price effect and substitution effect. The substitution effect relates to the change in the quantity demanded resulting from a change in the price of good due to the substitution of relatively cheaper good for a dearer one while keeping the price of the other good and real income and tastes of the consumer as constant. The decrease in quantity demanded due to increase in price of a product. In the case of inferior goods. Income effect arises because a price change changes a consumer s real income and substitution effect occurs when consumers opt for the product s substitutes.

The income effect expresses the impact of higher purchasing power on consumption. The substitution effect describes how consumption is impacted by changing relative income and prices. In the case of inferior goods the consumers tend to buy less of a commodity with a rise in income.