"The price effect can be split into two effects, substitution effect and income effect. Comment.

The price effect occurs when the price of a good changes and, as a result, there is a change in the quantity demanded. The price effect can be split into two effects: substitution effect and income effect. These two effects help in understanding how a change in the price of a good impacts a consumer's consumption choices in the market.

The substitution effect is the change in the quantity demanded of a good due to a change in its price, holding the consumer's total spending (or income) constant. When the price of a particular good decreases, it becomes relatively cheaper as compared to other goods available in the market. Consumers tend to replace the relatively expensive goods with the cheaper ones, thereby increasing its demand. Conversely, if the price of a good increases, it becomes relatively more expensive, and the consumer may substitute it with a cheaper alternative, decreasing its demand.

The income effect refers to the change in the quantity demanded of a good resulting from a change in the consumer's purchasing power (or real income) due to a change in the price of the good. If the price of a good falls, the consumer experiences an increase in their purchasing power as they can now buy more of the good with the same amount of money. This increase in purchasing power leads to an increase in the quantity demanded of the good (positive income effect). Conversely, when the price of a good rises, the consumer has less purchasing power, resulting in a decrease in the quantity demanded (negative income effect).

Both substitution and income effect work together to explain the overall price effect on the quantity demanded of a good. When the price of a good changes, it leads to a change in consumer preferences due to the substitution effect and a change in purchasing power due to the income effect. The total price effect is the combined effect of the substitution and income effect on the quantity demanded.

Let's consider a simple example of two goods: apples and oranges. Suppose that the price of apples decreases while the price of oranges remains the same. As apples become relatively cheaper, consumers may start preferring apples over oranges (substitution effect). Simultaneously, because of the price decrease, consumers' real income increases, allowing them to purchase more apples (income effect). Thus, the overall increase in demand for apples is a result of both substitution and income effects. In conclusion, the price effect on the quantity demanded can be split into substitution effect and income effect, both of which play a crucial role in understanding consumer behavior and their consumption choices when faced with changes in the prices of goods.