How does income and substitution effects apply to the law of demand?

1 Answer
Aug 10, 2015

Demand curve slopes downwards from left to right, because of the income and substitution effects.enter link description here


Income Effect
As the price of the commodity falls, the real income of the consumer increases. This induces the consumer to buy more of the same commodity. This is known as Income Effect.

Substitution Effect
The demand curve slopes downwards from left to right because of the substitution effect also. After a fall in the price of a good, its relative price also declines. It becomes relatively cheaper. The consumer will substitute this good in the place of other costly goods.