Practice question · Match the pairs
Match each concept to its definition.
- Substitution effect
- Income effect
- Normal good
- Inferior good
- Demand falls with income
- Response to change in real purchasing power
- Response to relative price change (always toward cheaper good)
- Demand rises with income
Hints
- One effect concerns relative prices, the other purchasing power.
- Only one of them can ever run the wrong way.
Show the answer
- Substitution effect → Response to relative price change (always toward cheaper good)
- Income effect → Response to change in real purchasing power
- Normal good → Demand rises with income
- Inferior good → Demand falls with income
Why
Substitution is about relative prices; income is about purchasing power. Their combination determines the demand slope.
Practise Income and Substitution Effects
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More questions on Income and Substitution Effects
- The substitution effect always pushes consumption of a cheapened good upward, and the income effect can push…
- The income effect of a price decrease always increases the quantity demanded of the cheaper good.
- Sort into normal goods vs inferior goods.
- For a Giffen good, demand rises when the price rises. Why does that not refute the law of demand?