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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.
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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.
144Personal Income & Personal Disposable Income:Personal Income Personal Disposable Income:PersonalIt measures the amount of after-tax income that households have to spend on goods andprofits plus the capital consumption allowance.
76Substitution and Income Effects:Substitution and Income Effects:effectconsumers tend to buy more of them when their income rises.
296Output, Income, and Expenditure Flows:and Expenditure Flows
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