#economics
When a good's price decreases, if hypothetically the same consumption bundle were to be retained, income would be freed up which could be spent on a combination of more of each of the goods. The effect of the relative price change is called the
substitution effect, while the effect due to income having been freed up is called the
income effect.
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Substitution effect - Wikipedia choice theory, the substitution effect is one component of the effect of a change in the price of a good upon the amount of that good demanded by a consumer, the other being the income effect. <span>When a good's price decreases, if hypothetically the same consumption bundle were to be retained, income would be freed up which could be spent on a combination of more of each of the goods. Thus the new total consumption bundle chosen, compared to the old one, reflects both the effect of the changed relative prices of the two goods (one unit of one good can now be traded for a different quantity of the other good than before as the ratio of their prices has changed) and the effect of the freed-up income. The effect of the relative price change is called the substitution effect, while the effect due to income having been freed up is called the income effect. If income is altered in response to the price change such that a new budget line is drawn passing through the old consumption bundle but with the slope determined by the new prices and Summary
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