The substitution effect of a decrease in the price of an inferior good encourages the consumer to purchase more of the good while the income effect encourages the consumer to purchase less of it.

Question

Quizplus · Accepted Answer

The substitution effect results in a higher quantity demanded of the good when its price decreases, regardless of whether it is an inferior or a normal good. However, the income effect of a decrease in price is different for inferior and normal goods. For inferior goods, the income effect results in a decrease in quantity demanded when the consumer's purchasing power increases, since they may prefer to switch to a higher-quality or more expensive good. This means that the substitution effect and income effect work in opposite directions for inferior goods, resulting in an ambiguous net effect on quantity demanded.

The Substitution Effect of a Decrease in the Price of an Inferior