A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as:

Question

Quizplus · Accepted Answer

The increase in purchasing power results in the consumer being able to afford more of the same good, leading to a change in the quantity demanded. This response is known as the income effect. The substitution effect, on the other hand, occurs when consumers switch to a cheaper good when the price of a good goes up, holding real income constant. The wealth effect refers to the change in consumption due to a change in overall wealth, not just purchasing power. The total effect of a price change is a combination of both the income and substitution effects.

A Change in Consumption of a Good Resulting from an Increase