Substitution And Income Effect On Indifference Curve

In some cases if a good is inferior enough the positive income effect may be so large that it leads to price increases decreases being accompanied by overall quantity increases decreases.

Substitution and income effect on indifference curve. Cheaper lentils income substitution effects this analysis breaks down the effect of a fall in the market price of lentils assumed to be an inferior good into an income effect and a substitution effect nuts lentils ic1 bl1 bl2 a. In this revision video we look at the income and substitution effects for an inferior good. If the amount of money income which was taken away from him is now given back to him he would move from s on indifference curve ic to r on a higher indifference curve ic 2. When the price falls the substitution effect is never perverse it will always cause more to be demanded.

The sum of the two effects to be very small. In this revision video we work through how to show the substitution and income effects arising from a fall in the market price of a product in our example w. This movement from q to s on the same indifference curve ic represents the substitution effect since it occurs due to the change in relative prices alone real income remaining constant.