Substitution effect- the substitution effect is, Ask an Expert

Economics

Substitution Effect

- The substitution effect is change in an item's consumption associated with the change in the price of the item, level of utility held constant.

- When the price of item declines, substitution effect leads to an increase in the quantity of item demanded.

Income Effect

- The income effect is change in the consumption of an item brought by increase in purchasing power, with the price of item held constant.

- When income of person increases, the quantity demanded for product can increase or decrease.

- Even with inferior goods, the income effect is sufficiently large to outweigh the substitution effect.

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M9511042

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