Question

How do income and substitution effects differ between normal and inferior goods?

Answer 1

Substitution effect is negative in both normal and inferior good.

But income effect is positive in inferior good and negative in normal good.

Positive income effect means when price of X decreases then there will be increase in real imcome and

when an increase in real income will increase the demand of X then It is said to have a negative income effect.

Thus negative income effect means a decrease in price of X will increase the demand of X through purchasing power which is negative income effect in normal good.

Whereas inferior good has positive income effect but substitution effect dominates income effect.