Theory of consumer behaviour — Economics STD 12 Humanities & Commerce — Question

1.  $\text{P}_\text{X}\downarrow\{\text{Real income(Y)}\uparrow\}\text{D}_\text{X}\uparrow$ and vice-versa.

Income effect: When the price of a commodity falls, the real income of the consumer, i.e., his purchasing power increases. As a result, he can now buy more of a commodity. This is called "income-effect". This causes increase in the quantity demanded of the good, whose price falls.

2.  $\text{P}_\text{X}\downarrow\{\text{Relative price}_\text{X}\downarrow\}\text{D}_\text{X}\uparrow$

Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than others. This induces the consumer to substitute the relatively cheaper commodity for the other good which is relatively expensive. This is called the "substitution effect”. This causes increase in quantity demanded of the commodity, whose price falls.