How would you decompose the total effect of a reduction in the price of an inferior good into the income and substitution effect components? What will happen if the income effect is too large?
When price of an inferior good falls, its negative income effect will tend to reduce the quantity purchased, while the substitution effect will tend to increase the quantity purchased. But normally it happens that negative income effect of change in price is not large enough to outweigh the substitution effect. If income effect is too large, then the quantity demanded will decrease.
Dear visitor, please use panel for submitting new questions
How will a simultaneous increase in the price of substitute good and
an improvement in production technology affect market demand and/or
supply, equilibrium price and equilibrium quantity in a competitive
Leave a comment
Thank you! Your comments have been successfully added. However, they need to be checked by the moderator before being published.