Give the meaning of the following:
i. Income effect
ii. Substitution effect
- Income effect: A change in the price of good causes a change in real income of the consumer and with a fall in price, it increases the real income. As a result, there is an expansion of demand for the good.
- Substitution effect: When price of one good falls, it becomes cheaper in relation to another good. As a result, one good is substituted for the other good. For example, with a fall in the price of tea, it is substituted for coffee.
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