Question

Comment on income levels and the substitution effect? Does the amount of disposable income really matter? (In other words, once your necessities (food, water, shelter, clothes, insurance, cell phone, etc. are paid, do you "need" to buy anything else (concert tickets, a new purse, a collectible, etc?  

Answer 1

Substitution effect means substituting expensive goods by cheaper ones. As the price of a good increases, the consumer would replace it with cheaper ones There is also income effect which emphasizes that if price would rise, then the real purchasing power or the disposable income reduces, so the demand of the good also reduces.

Disposable income is important because it determines the goods and services we can consume. Disposable income is the gross income less taxes. So it is rthe income that the consumer can actually spend. The main areas where the income should be spend is necessities ie food, shelter, clothes etc. But these are necessities. The income is also spend on other non-necessities like vacations, movies, handbags etc. These are considered as luxury goods that depend on disposable income.

As the disposable income increases, people tend to spend higher proportion on the luxury goods as the amount spend on neccessities usually remain the same. Hence it all depends on the disposable income, the lower the disposable income, the more percent of it is spend on necessities and higher disposable income indicates increased spending on the luxury goods.

(you can comment for doubts)