Answer to Question #124737 in Microeconomics for Ally Ahmed

Question

Clearly describe substitution effect and income effect for a fall in price for a normal good and an inferior good

Answer 1

Both normal goods and substitution effect work in the same direction. For instance, a decrease in the relative price of the good will result in an increase in quantity demanded. This is as a result of both goods being cheaper than substitute goods, thus the consumers have a greater total purchasing power and can increase their overall consumption. In the case of inferior good, a price reduction will lead to higher consumption and thus decreasing the decrease in consumption of normal goods.

 When the price of normal good reduces, then the substitution effect will cause higher consumption of normal and lower consumption of inferior, and the income effect will cause higher consumption of normal and lower consumption of inferior goods. Because the buyer now feels richer, they are less inclined to buy the inferior good.