If the substitution effect and the income effect of a price change move in opposite directions for a particular good,then the good must be an inferior good.

Question

Quizplus · Accepted Answer

According to the law of demand, the substitution effect of a price change always leads to an increase in the quantity demanded for a normal good. However, the income effect can either increase or decrease the quantity demanded depending on whether the good is normal or inferior. If the income effect and substitution effect move in opposite directions (i.e. substitution effect leads to an increase in quantity demanded while income effect leads to a decrease in quantity demanded), this indicates that the good is an inferior good.

If the Substitution Effect and the Income Effect of a Price