Income and substitution effect for a price increase

I can tell u the fundamental theory. it is a theory which tries to trace the effect on demand of a particular good when there is a price increase.... there will be two effects on the demand when a price of a good increases...

1. The customer might go for opting a substitute good — that is the demand for this good falls down if price of milk increases he might opt for more bread or something of that sort.... this is called substitution effect

2. The consumer is left with very less money than before— so he might opt for lesser quantity than before

The substitution effect occurs more when there is a substitute good available... e.g. substitution effect in case of demand for diamonds is rare...u don’t have much of a substitute... for both these effects we have seen only the case of price increase

There is also shift in demand when there is a decrease in price. Can anyone tell me what?

ü  Sir like tea can be substitute for coffee

Hmmm... yeah...but what happens when prices fall???....logical guess

ü  People may or may not come back to the previous good

ü  Due to decrease in price there's more money left so a person can buy more of the same good or a better quality good....like shifting towards milk from only grain consumption

ü  Sir, in income effect, price raise of a good leads to lesser consumption of it. (similar to less income) In substitution effect, price raise of a good causes consumers to substitute another good for it...

good you all know it already... demand might not exactly increase....there might be a substitution even if prices fall... but u have to read it as a whole...what is the income effect v/s the substitution effect

Economics part of upsc paper will need less of core theory of this sort...this is more of micro economics....very essential...but not so important from upsc angle. Concentrate on macroeconomics.