Income and Substitution Effects
The negative slope of the demand curve is due to the substitution and income effects. If the relative price of a good falls consumers will substitute that good for more expensive goods -that will buy more of the good whose relative price has fallen and less of the other goods. This is the substitution effect. When the relative price of a good falls the consumer can buy the same bundle of goods as before the price decline and have some money left over. This money can be used to purchase more of all his consumption goods. In other words his purchasing power is called the income effect.
Read more about this topic: Demand
Famous quotes containing the words income and, income, substitution and/or effects:
“We commonly say that the rich man can speak the truth, can afford honesty, can afford independence of opinion and action;—and that is the theory of nobility. But it is the rich man in a true sense, that is to say, not the man of large income and large expenditure, but solely the man whose outlay is less than his income and is steadily kept so.”
—Ralph Waldo Emerson (1803–1882)
“Some rough political choices lie ahead. Should affirmative action be retained? Should preference be given to people on the basis of income rather than race? Should the system be—and can it be—scrapped altogether?”
—David K. Shipler (b. 1942)
“To play is nothing but the imitative substitution of a pleasurable, superfluous and voluntary action for a serious, necessary, imperative and difficult one. At the cradle of play as well as of artistic activity there stood leisure, tedium entailed by increased spiritual mobility, a horror vacui, the need of letting forms no longer imprisoned move freely, of filling empty time with sequences of notes, empty space with sequences of form.”
—Max J. Friedländer (1867–1958)
“I am fearful that the paper system ... will ruin the state. Its demoralizing effects are already seen and spoken of everywhere ... I therefore protest against receiving any of that trash.”
—Andrew Jackson (1767–1845)