Can someone explain the effect of a change in price(income effect and substitution effect) on IC and BC?

specifically, its movement for inferior good, normal good, and giffen good. also i dont understand labour and supply's IC curve...

if explaining takes more than words please kindly refer me to a website with clear explanation other than wikipedia, i dont understand theirs.


The subsitution and income effect is termed the total effect of a price change. The income effect is the effect of a change in quantity demanded as a result of a change in real income suffered by a consumer due to the price change. For instance, given an income of $400 being used for a commodity say a pen worth $2, the income of $400 can buy 200 pens, with an increase in the price of the commodity to $4 each, without an increase in income, the consumer suffers a loss in real income as he can now purchase only 100 pieces of pen (real income is nominal income measured against price). The inability to purchase 100 more pens represents the income effect of price change. This is a reduction in real income which can now purchase 100 pieces of pens only.

The substitution effect of the price change exists assuming the price of other commodities (say pencil ) the pen is being compared to remains the same. In this case the price of the pen increases as compared to the pencil, so normally, the pencil will be substituted for the pen which is now comparatively expensive, the pen again suffers a fall in quantity demanded which reinforces the initial fall in quantity due to a fall in real income as the price of the good in question increases. This is the case of a normal good.

The income effect of a normal good is negative( as price increases, less is demanded as real income falls) and the substitution effect of a normal good is negative( as price increases a comparison good is substituted fo it).

With an inferior good the income effect is negative that is for instance in the example above, with an increase in the price of pen, the quantity demanded falls as result of a fall in real income. What differs for an inferior good is that the substitution effect is positive( as price of pen increases more pen is demanded and is substituted for the pencil which has a constant price, hence less pencil is bought) but the increase in the demad due to the substituton effect is inadequate to offset the fall in demand due to the income effect. As such the total effect of the price increase results in a reduction in quantity demanded for an inferior good, assuming pen is an inferior good).

With a giffen good, the positive substitution effect of the price change outweighs the negative income effect of the price change, making the total effect of the good positive, that is an increase in price of a giffen good results in an increase in demand of the good.

I hope this helps you out.
The Income Effect

As the price of a good or service increases, the money a person has left over is reduced. This is the same as saying that real incomes fall as prices rise. For example, assume someone has a fixed income of 120 dollars a week. If the price of a bottle of wine is 10 dollars they can buy 12 bottles. If the price doubles to 20 dollars now they can only afford 6 bottles. If the price were 30 dollars, only 4 bottles could be bought. So as the price of wine increases, the ability to afford them falls. Notice that income in the example is fixed, it does not change.

The Substitution Effect

As the price of goods increases, people are likely to purchase other products instead. Substitutes are goods or services that are similar. For example Pepsi Cola and Coca-Cola are substitutes. As the price of Coca-Cola rises people stop buying Coke and buy Pepsi instead.

Giffen Good - a special type of inferior good, quantity demanded rises when price rises. A positive income effect outweighs a negative substitution effect.

i hope this will help

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