Income and Substitution Effect

A fall in the price of a Good has two effects:

1. Consumers will buy more of a good that is cheaper and less of the good which has become expensive. This consequence to a change in the price of a relative good is called the Substitution effect.
2. Secondly When a good become cheaper, consumers are pleased with their increase in their real purchasing power . Because now you are buying the same quantity at a lower price. This is the INcome Effect.

By definition:

Substitution Effect:

Change in consumption of a good related to the change in its price , with the level of utility held constant (Off course! if your eating more than you did before just because the prices fall than its different ).

Income Effect:

Change in consumption of a good resulting from an increase in purchasing power with relative prices held constant.

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