change in the price of goods in general leads to a decrease in demand.The reason is that we have the effect of income and substitution effects, which determine this type of chart equilibrium in the market.These two phenomena are so interconnected that scientists are still working to develop methods that help to differentiate quantitatively their impact.
substitution effect is that the buyer is committed to buy more goods, value of which declined, replacing them more expensive goods.So evident impact on the demand price of substitute products, the willingness of consumers to buy certain products.If substitutes are more expensive, it will grow, and if less, then fall.However, the income effect and the substitution effect does not concern luxury goods and so-called Giffen goods.This is due to the fact that in the case of one of them acts stronger than the other vectors, so the demand will change, ceteris paribus in the same direction as the price of goods.
word income effect is that the reduction value of the budget is released consumer, making it relatively richer.If the price of a required subject products increases, it becomes relatively poor, which leads to the fact that it reduces the consumption of almost all the usual benefits.Here comes into effect and the substitution effect, which causes the buyer to seek substitutes for the appreciated products to be able to meet all their needs more fully.Therefore, the combined effect of income and substitution effects have a significant impact on prices and competition in the industry, and hence on market conditions.
As mentioned above, the economy there is a problem with differentiation effect on the quantity demanded of the two oppositely directed vectors.The effect of income and substitution effects are usually treated on the basis of two approaches.Adherents of the first approach, developed by EESlutsky, insist that the same can only be called the level of income that provides the same set of products.Graphic model Slutsky indicates that the optimal consumer choice is determined by the point of tangency of the indifference curve and the budget line.To examine the effect of income and substitution effects alone Slutsky draws additional budget line associated with a change in the relative income of the consumer caused by the decrease or increase in the price of goods.Then the scientist conducting another budget line, but without the first factor that allows us to calculate the substitution effect with the help of this chart pattern.
similar approach demonstrates and foreign economist John. Hicks, who comes from the fact that the relative level of income depends on the utility of goods that it purchased.Therefore, if different amounts, in absolute terms provide the same needs, in relative terms, they are equal.
