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What is the difference between substitution effect and the income effect of the price?

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Question added by rowlland kudzai , Sales and Business Development Representative , K & V Group DMCC - Gulf Brokers DMCC
Date Posted: 2017/02/02
Tamer Assaf
by Tamer Assaf , Construction Division Manager , Wurth Gulf FZE

Well, The substitution effect measures how much the higher price encourages consumers to use other goods, assuming the same level of income. So for a constant income a customer would buy two Toyotas instead of two Mercedes-Benz.

The income effect looks at how the price change effects consumer income. If price rises, it effectively cuts disposable income and there will be lower demand. So the customer would buy one Toyota instead of two.

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