GENERAL KNOWLEDGE

Detailed explanation-1: -On the other hand, when the price of a good decreases, the purchasing power of a consumer increases. The change in the consumption that results from this change in purchasing power is the income effect.

Detailed explanation-2: -What is the Substitution Effect? The substitution effect refers to the change in demand for a good as a result of a change in the relative price of the good compared to that of other substitute goods. For example, when the price of a good rises, it becomes more expensive relative to other goods in the market.

Detailed explanation-3: -The income effect is the change in the consumption of goods by consumers based on their income (purchasing power). The substitution effect happens when consumers replace cheaper items with more expensive ones due to price changes or when their financial conditions improve, and vice-versa.

Detailed explanation-4: -The effect on purchases of this reduction of purchasing power is called the income effect of the price change. Its effect via the relative price change is called the substitution effect.