A price effect describes how a change in the cost of a good changes the amount consumers buy. It is the sum of two parts: the substitution effect and the income effect.

Components of Price Effect:

• Substitution Effect: When a price drops, the good becomes cheaper compared to others. Consumers choose to buy more of the cheaper good instead of more expensive alternatives. This assumes the consumer’s real purchasing power stays the same.
• Income Effect: When a price drops, the consumer’s purchasing power (real income) effectively increases because they have money left over. This allows them to buy more overall.

How these effects interact:

• For normal goods: The income effect encourages buying more, helping the substitution effect.
• For inferior goods: The income effect works against the substitution effect.
• For Giffen goods: The income effect is so strong that it outweighs the substitution effect, causing consumers to buy less when the price falls.

Total Price Effect = Substitution Effect + Income Effect

Example: If movie ticket prices drop, you might choose movies over staying home (substitution effect) and also start going to the movies more often because your money now goes further (income effect).