Demand (economics) - Income and Substitution Effects

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 (economics)

Famous quotes containing the words income and, income, substitution and/or effects:

    I know everybody’s income and what everybody earns,
    And I carefully compare it with the income-tax returns;
    Sir William Schwenck Gilbert (1836–1911)

    The bread-winner must toil as in the fruitless effort of a troubled dream while the expenditure of an uneducated wife discounts the income in the lack of understanding to discern the broad possibilities of an intelligent economy.
    Anna Eugenia Morgan (1845–1909)

    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)

    One of the effects of a safe and civilised life is an immense oversensitiveness which makes all the primary emotions somewhat disgusting. Generosity is as painful as meanness, gratitude as hateful as ingratitude.
    George Orwell (1903–1950)