Income And Substitution Effect On Inferior Goods

If x is an inferior good the income effect of a fall in the price of x will be positive because as the real income of the consumer increases less quantity of x will be demanded.

Income and substitution effect on inferior goods. Inferior goods are cheap alternatives for normal goods. Tutorial on understanding the income and substitution effects for normal and inferior goods when the price of a good rises and income and substitution effect. It is because an inferior good reacts differently to a change in income. Its demand increases with decrease in income and vice versa.

In this revision video we look at the income and substitution effects for an inferior good. Substitution and income effects for an inferior good. Therefore consumption of inferior goods by a person decreases if income increases above a certain level. The net effect equal the difference between substitution effect and income effect.

In case of an inferior goods also called giffen good the income effect and substitution effect work in opposite directions i e. Price effect be bd substitution effect de income effect. People use inferior goods when they are unable to afford normal goods or expensive goods.