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)

    A sociosphere of contact, control, persuasion and dissuasion, of exhibitions of inhibitions in massive or homeopathic doses...: this is obscenity. All structures turned inside out and exhibited, all operations rendered visible. In America this goes all the way from the bewildering network of aerial telephone and electric wires ... to the concrete multiplication of all the bodily functions in the home, the litany of ingredients on the tiniest can of food, the exhibition of income or IQ.
    Jean Baudrillard (b. 1929)

    Virtue is the adherence in action to the nature of things, and the nature of things makes it prevalent. It consists in a perpetual substitution of being for seeming, and with sublime propriety God is described as saying, I A—.
    Ralph Waldo Emerson (1803–1882)

    Virtues are not emotions. Emotions are movements of appetite, virtues dispositions of appetite towards movement. Moreover emotions can be good or bad, reasonable or unreasonable; whereas virtues dispose us only to good. Emotions arise in the appetite and are brought into conformity with reason; virtues are effects of reason achieving themselves in reasonable movements of the appetites. Balanced emotions are virtue’s effect, not its substance.
    Thomas Aquinas (c. 1225–1274)