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:
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