Income, Substitution & Demand Effects

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Abstractions about how price and income changes decompose consumer demand, including normal, inferior, and Giffen-good behavior.

5 abstractions in this family — domain-specific abstractions that sit near one another in structural-signature space (k-means over structural-signature embeddings). Each is shown with its short description.

• Giffen Good — A good whose quantity demanded rises as its own price rises — the rare case where a good is inferior and its income effect outweighs its substitution effect, flipping the Marshallian demand curve upward in apparent violation of the law of demand.
• Income Effect — Split a consumer's demand response to a price change into the part driven purely by the shift in real purchasing power — separating it from re-optimization toward cheaper substitutes — so a good's Engel-curve slope classifies it as normal, inferior, or Giffen.
• Inferior Good — Classify a good by the sign of its income elasticity: one whose demand falls as income rises (η_Y < 0), because a rising budget lets the consumer shift toward a preferred substitute now within reach — with the Giffen good as its extreme tail.
• Slutsky Decomposition — Decompose a price-induced change in consumer demand into a compensated substitution effect from changed relative prices and an income effect from changed real purchasing power, so the two terms sum exactly to the observed response.
• Substitution Effect — Isolate the part of a consumer's demand response to a price change that comes purely from shifted relative prices, holding real purchasing power constant, by hypothetically compensating income and observing how she reallocates toward the now-cheaper goods.