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Substitution Effect
- The substitution effect is change in an item's consumption associated with the change in the price of the item, level of utility held constant.
- When the price of item declines, substitution effect leads to an increase in the quantity of item demanded.
Income Effect
- The income effect is change in the consumption of an item brought by increase in purchasing power, with the price of item held constant.
- When income of person increases, the quantity demanded for product can increase or decrease.
- Even with inferior goods, the income effect is sufficiently large to outweigh the substitution effect.
Price elasticity of supply – Computes the percentage change in quantity supplied resulting from a 1 percent variation in price. – The elasticity is usually positive as price
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The cross elasticity of demand calculates the responsiveness of the quantity demanded of one product to alters in the price of another product. For example, the quantity demanded
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