1. Explain the price effect income effect and substitution effect with the help of indifference curve and show the price effect is a combination of income effect and substitution effect ?
Answers
Answer:
The income effect expresses the impact of increased purchasing power on consumption, while the substitution effect describes how consumption is impacted by changing relative income and prices.
Answer:
Price effect is the change in demand for a good due to the change in its price. It's adequate to Substitution effect plus Income effect.
The substitution effect is the change in demand for a good because it becomes relatively expensive/cheaper in comparison with its substitute. Now, when the price changes, the precise same thing happens. the worth of substitute remaining constant, the relative price of the given good changes.
The income effect is the change in the demand for a good because of the change in consumers' disposable income. Now when the price changes, the buyer can buy more/less of the same good with the given income. Hence, with his income remaining the same, he can vary his demand consistent with the price. Thus, once you add these two effects, you get the worth Effect.
This is clearly depicted in the diagram below attached.
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