Income and substitution effects
When there is a change in the price of something, we typically change how much of it we buy. If something is a normal good, we’ll buy more of it as our income increases. If something is an inferior good, we buy less of it as our income increases.
We can model these changes in prices and changes in behavior with indifference curves and budget lines, which are covered in great detail in this guide here.
The video embedded below—in addition to all these others—explains the process of doing this:
- Example Income and Substitution Effects for Normal and Inferior Goods
- Explanation of Income and Substitution Effects
- EC1002 Chapter 2 Lesson 2 - The Indifference Curve, Substitution, and Income Effect (this one is long and detailed, but still helpful, especially around minute 21)