The total effect of a price change is equal to the sum of the substitution effect and income effect" Explain.

Question

answer should base on micro economics

Answer 1

Every price change can be broken down into both an income effect and a substitution effect. The substitution effect is the price change that changes the slope of the budget constraint, but leaves the consumer on the same indifference curve. This effect will always cause the consumer to substitute away from the good that is becoming comparatively more expensive. The income effect will react depending upon the type of good in question. It is the change in the shifting of the budget constraint, moving to a different indifference curve. If the good is a normal good, then an increase in income will increase the amount of the good purchased. If the good is inferior, then an increase in income will cause less of the good to be purchased.

Hope this helps.

Answer 2

Total Effect Definition