What is the Substitution Effect?

From the Law of Demand, we saw that for the same good or service, if the price goes down, the quantity demanded goes up and the same thing happens in reverse: if the price goes up, the quantity demanded goes down.

The substitution effect occurs, when the price of the good goes up and the consumer makes a change to substitute it with something else. This works with normal goods and inferior goods.

What is the Income Effect?

The income effect occurs, when the price of the good goes down and the consumer not has more purchasing power to acquire more units. Same price, more units, they spend the same and get more. This works with normal goods and not inferior goods.