Question

When the price of a good rises, consumers buy a smaller quantity because of the ________ effect and the ________ effect?

Answer 1

When the price of a good rises, consumers buy a smaller quantity because of the substitution effect and the income effect. A change in the relative prices of goods results in change in consumption of that goods and that is denoted as the substitution effect. The change in purchasing power on the other hand which also result in change in consumption is referred to as the income effect.