Answer to Question #82296 in Microeconomics for Gaurang

Question

Income and substitution effect

Answer 1

The income effect demonstrates the ramifications for increased purchasing power on consumption. Correspondingly, the substitution effect expresses how changes in prices and relative income affects consumption (Mankiw, 2017). Thus, the substitution effect confirms that as the prices of products rises people will look for ways of replacing the ones which they deem expensive with less costly alternatives.