Income Effect and Substitution Effect

• A price change has two effects on consumption.
– Income effect
– Substitution effect
• The Income Effect
– The income effect is the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve.
• The Substitution Effect
– The substitution effect is the change in consumption that results when a price change moves the consumer along an indifference curve to a point with a different marginal rate of substitution

Richa Shukla
Globsyn Business School