Question

How Changes in Income Affect Consumer Choices ?

How Price Changes Affect Consumer Choices ?

Answer 1

A change in income changes the budget of the consumer so that the original choice is altered. In case there is an increase in income, the budget constraint shifts up, increasing number of affordable bundles, allowing the consumer to increase consumption of both the goods. The opposite happens when income is decreased

A change in price of one good creates income and substitution effects. Generally, a price increase results in reducing the consumption of that good and raises the consumption of the other. The opposite happens when price is decreased. A common assumption is that in this case income remains unchanged and the good is a normal one.