Question

Distinguish between income and substitution effects of a price change for a consumer

Discuss the history of development of Economics as a discipline

Answer 1

1) The income effect refers to changes in real income of consumer resulting from a change in commodity prices. The substitution effect refers to the substitution of one product for another occurring due to a change in their relative price. Due to income effect there is a movement along income-consumption curve; while due to the substitution effect there is a movement along price-consumption curve.

With an increase in the commodity price the income effect decreases the disposable income, which in turn reduces the quantity demanded; while with a fall in price it increases real spending power of a consumer the substitution effect which helps the customers to buy more, with the provided budget. On contrary with an increase in the commodity price as alternative commodities are comparatively cheaper and thus customers will switch to other commodities; while with a fall in price it make commodity cheaper than its substitutes, thus will attract more customers and result in higher demand