Question

Difference between income effect and substitution effect

Answer 1

The economic concepts of income effect and substitution effect express changes in the market and how these changes impact consumption patterns for consumer goods and services. 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. Different goods and services experience these changes in different ways. Some products, called inferior goods, generally decrease in consumption whenever incomes increase. Consumer spending and consumption of normal goods typically increases with higher purchasing power, in contrast with inferior goods.