An increase in the price of a normal good works in an equivalent fashion The higher price causes consumers to substitute more of other goods, whose prices are now relatively lower The substitution effect thus reduces the quantity demanded The higher price also reduces purchasing power, causing consumers to reduce consumption of the good via the income effect Inferior Goods In the chapter that introduced the model of demand and supply, we saw that an inferior good is one for which demand falls when income rises It is likely to be a good that people not really like very much When incomes are low, people consume the inferior good because it is what they can afford As their incomes rise and they can afford something they like better, they consume less of the inferior good When the price of an inferior good falls, two things happen: Consumers will substitute more of the inferior good for other goods because its price has fallen relative to those goods The quantity demanded increases as a result of the substitution effect The lower price effectively makes consumers richer But, because the good is inferior, this reduces quantity demanded The case of inferior goods is thus quite different from that of normal goods The income effect of a price change works in a direction opposite to that of the substitution effect in the case of an inferior good, whereas it reinforces the substitution effect in the case of a normal good Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 377