INCOME AND

SUBSTITUTION
EFFECTS
Presented by: Justine Kate Carbonell
 INCOME EFFECT

The income effect refers to the change in the quantity

demanded of a good or service resulting from a change in
a consumer's income
 INCOME EFFECT

Normal Goods: When a consumer's income increases, the

demand for normal goods typically increases.

Inferior Goods: On the contrary, inferior goods are those for

which demand decreases as income rises.
 SUBSTITUTION EFFECT

The substitution effect, in contrast, refers to the change in the

quantity demanded of a good or service due to a change in
its relative price, while keeping the consumer's income
constant.
 SUBSTITUTION EFFECT

Price Increase: When the price of a good rises, consumers

often seek substitutes that offer better value for their money.

Price Decrease: Conversely, when the price of a good

decreases, consumers may reduce their consumption of
substitutes and buy more of the now cheaper product.
 CONCLUSION

In conclusion, income and substitution effects are crucial

concepts in the field of economics that help explain how
consumers respond to changes in income and prices. The
income effect highlights how shifts in income impact the
consumption of normal and inferior goods, while the
substitution effect emphasizes how changes in relative prices
drive consumers to switch between goods and services.