income and substitution effects of price changes

The income effect of a price change is the change in the purchasing power of a person’s real income. A decreased price results in an income effect where the same purchasing power can be achieved with fewer funds. This can create an incentive to purchase more of the good in question. The substitution effect of a price change is the change in the amount of a good that a person is willing to purchase for a given amount of money. A decreased price results in a substitution effect where the good becomes relatively more attractive relative to other goods. This can create an incentive to buy more of the good in question, as opposed to its substitutes.