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.


Normal Good:

If consumption of that god increase due to a decrease in it price than it is a normal Good.

Inferior Good:

A good is inferior if there is a decrease in the consumption of that good. This means that the income effect is negative.

Giffen Good: The Special Case

These are good whose demand curve slopes upward because the (negative ) income effect is larger than the substitution effect. if incase one good becomes inferior than you tend to buy more of the other good which leads to an upward sloping demand curve. This also means that one good decrease in price leads to a lower quantity demanded for it.