Substitution and Income Effects

Two reasons why a consumer would be expected to purchase more of a good when its price falls: the substitution effect and the income effect of a change in price.

The substitution effect

A decrease in price tends to cause consumers to buy more of this good in place of other goods.

The income effect

The price of something falls while the consumer’s money income and the prices of all other goods remain unchanged. There is an increase in purchasing power or real income.

For most goods and services, consumers tend to buy more of them when their income rises.