Income And Substitution Effect Inferior Good Price Increase

However when the price of an inferior good falls the consequence will be an increase in the quantity demanded because of significant negative income effect.

Income and substitution effect inferior good price increase. It means that when the price of the inferior good falls the consumer purchases more of it due to compensating variation in income. In the case of inferior goods the two effects of price change actually work in opposite directions. The negative substitution effect is stronger than the positive income effect in the case of inferior goods so that the total price effect is negative. In figure 3 x axis represents inferior goods commodity x and y axis denotes superior goods commodity y.

The income effect expresses the impact of higher purchasing power on consumption. For example if private universities increase their tuition by 10 and public universities increase their tuition by 2 thenwe d probably see a shift in attendance from private to public universities at least amongst students. Sub u1 inc b3 b1 total u2 b2 x3 x3 x1 the price of increases causing the. The substitution effect and income effect of price increase for an inferior good.

The substitution effect is the change in consumption patterns due to a change in the relative prices of goods. The substitution effect also led to an increase in consumption of bread. The substitution effect describes how consumption is impacted by changing relative income and prices. 11 we see that bread being a normal good the fall in its price led the consumer to buy more of it as a result of consumer s real income gain.

Income effect arises because a price change changes a consumer s real income and substitution effect occurs when consumers opt for the product s substitutes. The case of x as an inferior good is illustrated figure 15 20.