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Together, these form the total price effect."},{"text":"Wealth effect and output effect.","correct":false,"explanation":"Wealth and output effects are not the standard decomposition of a price change in consumer theory. The correct components are the substitution effect and income effect, reflecting relative prices and purchasing power."},{"text":"Demand effect and supply effect.","correct":false,"explanation":"Demand and supply effects describe market interactions rather than the response of an individual consumer to a price change. The total effect consists of the substitution effect and income effect."},{"text":"Utility effect and budget effect.","correct":false,"explanation":"Utility and budget effects are not the named components used in this decomposition. A price change creates a substitution effect from changed relative prices and an income effect from changed real income."}]},{"id":"d0653d7b-131f-403d-b7b8-04749c692d0e","cardType":"basic","points":2,"front":"Why does a fall in a good's price create a substitution effect?","back":"It makes the good cheaper relative to other goods.","mcqOptions":[{"text":"It makes the good cheaper relative to other goods.","correct":true,"explanation":"A fall in the good’s price changes its relative price, making it cheaper compared with alternatives. Consumers are therefore encouraged to substitute towards it, holding utility constant in the substitution analysis."},{"text":"It makes the good more expensive relative to other goods.","correct":false,"explanation":"A lower price makes the good less expensive, not more expensive, relative to alternatives. The correct explanation is that it becomes cheaper relative to other goods, encouraging substitution towards it."},{"text":"It makes all goods cheaper relative to the good.","correct":false,"explanation":"Only the selected good’s price has fallen in this situation, so it becomes cheaper relative to other goods. Reversing the comparison wrongly predicts substitution away from the good."},{"text":"It makes the good cheaper because real income has fallen.","correct":false,"explanation":"The substitution effect comes from a change in relative prices, not from falling real income. A lower price normally raises real income, while the relevant comparison is that the good becomes cheaper than alternatives."}]},{"id":"4c32aea3-307e-47fd-9624-5d053588b2bd","cardType":"basic","points":1,"front":"Which good does the substitution effect always favour?","back":"The good that has become relatively cheaper.","mcqOptions":[{"text":"The good that has become relatively cheaper.","correct":true,"explanation":"The substitution effect always shifts consumption towards the good whose price has fallen relative to other goods. This direction is independent of whether the good is normal, inferior or Giffen."},{"text":"The good that has become relatively more expensive.","correct":false,"explanation":"Consumers generally substitute away from a relatively more expensive good, rather than towards it. The substitution effect always favours the good that has become relatively cheaper."},{"text":"The good with the higher marginal utility.","correct":false,"explanation":"Marginal utility helps determine consumer equilibrium but does not define the direction of the substitution effect. That effect favours the good whose relative price has decreased."},{"text":"The good with the greater income elasticity.","correct":false,"explanation":"Income elasticity determines how demand responds to income changes, not which good substitution favours. Substitution always favours the good that has become relatively cheaper."}]},{"id":"1baf19a0-2194-4b45-be7f-485d10f179dd","cardType":"basic","points":2,"front":"How is the substitution effect shown on an indifference-curve diagram?","back":"As a move along the original indifference curve to the new price ratio.","mcqOptions":[{"text":"As a move along the original indifference curve to the new price ratio.","correct":true,"explanation":"The substitution effect isolates the impact of the changed relative price while keeping utility constant. On the diagram, this is shown by moving along the original indifference curve to the new price ratio."},{"text":"As a move along the new indifference curve to the original price ratio.","correct":false,"explanation":"This reverses both parts of the construction. The substitution effect keeps the original utility level and moves to the new price ratio, so it is shown along the original indifference curve."},{"text":"As a shift from the original budget line to the new indifference curve.","correct":false,"explanation":"The substitution effect is not represented by moving directly between a budget line and an indifference curve. It is a movement along the original indifference curve caused by the new relative price."},{"text":"As a shift to the highest attainable indifference curve at the original price ratio.","correct":false,"explanation":"Moving to the highest attainable curve combines purchasing-power and price effects rather than isolating substitution. The substitution effect stays on the original indifference curve and reaches the new price ratio."}]},{"id":"7b4df471-e7fa-48d3-8300-6c92c7c9869e","cardType":"basic","points":2,"front":"Why does a lower price increase real income?","back":"The same money income can now buy more goods.","mcqOptions":[{"text":"The same money income can now buy more goods.","correct":true,"explanation":"When a price falls, the consumer’s existing money income has greater purchasing power. With the same income, they can afford a larger bundle of goods, so real income rises."},{"text":"The same money income can now buy fewer goods.","correct":false,"explanation":"A lower price increases purchasing power, so the same income can buy more rather than fewer goods. Buying fewer goods would describe a fall in real income caused by higher prices."},{"text":"The same money income can now buy the same goods only.","correct":false,"explanation":"The consumer can still buy the original bundle, but the lower price leaves purchasing power available for additional goods. Therefore, real income rises because the same income can buy more goods."},{"text":"The same money income can now buy more money income.","correct":false,"explanation":"Real income means purchasing power over goods and services, not the amount of money income itself. A lower price means the same money income can now buy more goods."}]},{"id":"2f72a8da-9e17-481d-80a4-dcb9f31edf2a","cardType":"basic","points":1,"front":"How is the income effect shown on an indifference-curve diagram?","back":"As a shift to a new indifference curve.","mcqOptions":[{"text":"As a shift to a new indifference curve.","correct":true,"explanation":"The income effect captures the change in purchasing power after the price change. On an indifference-curve diagram, this changes the consumer’s attainable utility level and shifts consumption to a new indifference curve."},{"text":"As a movement along the original indifference curve.","correct":false,"explanation":"Movement along the original indifference curve represents the substitution effect because utility is held constant. The income effect changes purchasing power and therefore shifts consumption to a new indifference curve."},{"text":"As a shift to a new budget line only.","correct":false,"explanation":"A changed budget line reflects the price change, but it does not by itself show the income effect. The income effect is shown by the resulting shift from the original to a new indifference curve."},{"text":"As a movement along the original budget line.","correct":false,"explanation":"The original budget line does not represent the changed purchasing power after a price change. The income effect is shown as a shift to a new indifference curve."}]},{"id":"33f2ad9b-2680-44e3-8f9b-3b47606fb317","cardType":"basic","points":1,"front":"What is the relationship between the price effect, substitution effect and income effect?","back":"$$$\\text{PE} = \\text{SE} + \\text{IE}$$","mcqOptions":[{"text":"$$$\\text{PE} = \\text{SE} + \\text{IE}$$","correct":true,"explanation":"The total price effect is the combined change in quantity demanded caused by the substitution effect and the income effect. Therefore, price effect equals substitution effect plus income effect."},{"text":"$$$\\text{PE} = \\text{SE} - \\text{IE}$$","correct":false,"explanation":"The effects are combined algebraically, not always subtracted. A negative income effect is already represented by its sign, so the correct relationship is price effect equals substitution effect plus income effect."},{"text":"$$$\\text{PE} = \\text{IE} - \\text{SE}$$","correct":false,"explanation":"This reverses the decomposition and would give the wrong direction when both effects increase demand. The price effect is the sum of the substitution effect and income effect."},{"text":"$$$\\text{PE} = \\text{SE} \\times \\text{IE}$$","correct":false,"explanation":"The two component effects are not multiplied. Their signed changes are added to obtain the total price effect, so the correct relationship is PE = SE + IE."}]},{"id":"3ba81dbc-7d40-42da-8731-e021bb095868","cardType":"basic","points":1,"front":"What happens to the quantity demanded of a normal good when real income rises?","back":"Quantity demanded rises.","mcqOptions":[{"text":"Quantity demanded rises.","correct":true,"explanation":"A normal good has positive income elasticity of demand. When real income rises, consumers demand more of it, so its quantity demanded rises, assuming other relevant factors remain unchanged."},{"text":"Quantity demanded falls.","correct":false,"explanation":"Falling quantity demanded as real income rises is characteristic of an inferior good, not a normal good. For a normal good, positive income elasticity means quantity demanded rises."},{"text":"Quantity demanded stays constant.","correct":false,"explanation":"Constant demand as income changes would indicate zero income elasticity, which is not the defining behaviour of a normal good. Normal goods have positive income elasticity, so demand rises."},{"text":"Quantity demanded becomes perfectly elastic.","correct":false,"explanation":"Income changes affect the quantity demanded of a normal good, but they do not make its demand curve perfectly elastic. Positive income elasticity means quantity demanded rises as real income rises."}]},{"id":"09b0d237-ca49-4efa-98f8-a437df28917c","cardType":"basic","points":2,"front":"For a normal good, why does a price fall cause a strong rise in quantity demanded?","back":"

The substitution effect raises quantity.
The income effect also raises quantity.

","mcqOptions":[{"text":"

The substitution effect raises quantity.
The income effect also raises quantity.

","correct":true,"explanation":"A price fall makes the good relatively cheaper, encouraging substitution towards it. It also increases consumers’ real income, and for a normal good this leads them to buy more."},{"text":"

The substitution effect lowers quantity.
The income effect also lowers quantity.

","correct":false,"explanation":"This reverses both effects. A lower relative price encourages substitution towards the good, while higher real income increases purchases of a normal good, so both effects raise quantity demanded."},{"text":"

The substitution effect raises quantity.
The income effect lowers quantity.

","correct":false,"explanation":"The second effect describes an inferior good, not a normal one. Higher real income increases demand for a normal good, reinforcing the substitution effect after the price falls."},{"text":"

The substitution effect lowers quantity.
The income effect raises quantity.

","correct":false,"explanation":"Although higher real income raises demand for a normal good, the substitution effect is also positive after its price falls because the good becomes relatively cheaper."}]},{"id":"9b4f8bb8-9aaa-42fa-983b-a0f551b9aa3b","cardType":"basic","points":2,"front":"For an ordinary inferior good, why does the income effect oppose the substitution effect?","back":"Higher real income causes quantity demanded of an inferior good to fall.","mcqOptions":[{"text":"Higher real income causes quantity demanded of an inferior good to fall.","correct":true,"explanation":"An inferior good is demanded less as consumers’ real income rises. Therefore, after a price fall, its negative income effect offsets, rather than reinforces, the substitution effect."},{"text":"Higher real income causes quantity demanded of a normal good to rise.","correct":false,"explanation":"This describes a normal good, whose income effect reinforces substitution after a price fall. For an inferior good, higher real income reduces demand, creating an opposing effect."},{"text":"Higher real income causes quantity demanded of an inferior good to rise.","correct":false,"explanation":"The income response has been reversed. Inferior goods are bought in smaller quantities when real income increases, so their negative income effect opposes the positive substitution effect."},{"text":"Higher real income causes quantity demanded of an ordinary good to remain unchanged.","correct":false,"explanation":"An unchanged response would imply no income effect. Ordinary inferior goods do respond negatively to higher real income, reducing quantity demanded and partially offsetting substitution."}]},{"id":"c1af3c8d-1537-41e7-8e22-17105be3a54a","cardType":"basic","points":2,"front":"Why does demand usually still slope downward for an inferior good?","back":"The substitution effect dominates the negative income effect.","mcqOptions":[{"text":"The substitution effect dominates the negative income effect.","correct":true,"explanation":"For an inferior good, a price fall creates a positive substitution effect but a negative income effect. Demand still slopes downward when the substitution effect is larger."},{"text":"The negative income effect dominates the substitution effect.","correct":false,"explanation":"If the negative income effect were larger, a price fall would reduce quantity demanded and demand would slope upward, as with a Giffen good rather than an ordinary inferior good."},{"text":"The income effect eliminates the substitution effect.","correct":false,"explanation":"The opposing income effect usually reduces the overall response but does not cancel it completely. Demand remains downward-sloping when substitution retains a net positive influence."},{"text":"The substitution effect reverses the negative income effect.","correct":false,"explanation":"The substitution effect does not reverse the income effect itself; it outweighs it. Their opposing influences leave a positive net response to a price fall."}]},{"id":"24285be8-aa27-4ca9-bd65-c72b296b36ab","cardType":"basic","points":2,"front":"What makes a Giffen good strongly inferior?","back":"It is a staple with few substitutes that takes a large share of income.","mcqOptions":[{"text":"It is a staple with few substitutes that takes a large share of income.","correct":true,"explanation":"A staple with few alternatives and a large budget share makes consumers especially sensitive to changes in real income. This can make the negative income effect dominate substitution."},{"text":"It is a staple with many substitutes that takes a small share of income.","correct":false,"explanation":"Many substitutes and a small income share weaken the required income effect. A Giffen good must be a staple with few alternatives and a large budget share."},{"text":"It is a luxury with few substitutes that takes a large share of income.","correct":false,"explanation":"Few substitutes and a large income share help create a strong income effect, but a Giffen good must be strongly inferior, typically a staple rather than a luxury."},{"text":"It is a luxury with many substitutes that takes a large share of income.","correct":false,"explanation":"A luxury is normally demanded more as income rises, giving a positive income effect. Giffen behaviour requires a strongly inferior staple, usually with few substitutes."}]},{"id":"23f94382-b4c4-4464-a3e4-1f3bb0fc0616","cardType":"basic","points":2,"front":"Why can a Giffen good have an upward-sloping demand response?","back":"Its strong negative income effect outweighs the substitution effect.","mcqOptions":[{"text":"Its strong negative income effect outweighs the substitution effect.","correct":true,"explanation":"A price rise creates a negative substitution effect but increases effective scarcity-related real-income pressure for an inferior staple. If the negative income effect is stronger, quantity demanded rises."},{"text":"Its strong positive income effect outweighs the substitution effect.","correct":false,"explanation":"A Giffen good is strongly inferior, so its income effect is negative, not positive. Only a negative income effect larger than substitution can produce an upward-sloping response."},{"text":"Its weak negative income effect outweighs the substitution effect.","correct":false,"explanation":"Giffen behaviour requires a strong negative income effect. A weak one cannot outweigh the substitution effect, so the usual downward-sloping demand response remains."},{"text":"Its strong negative substitution effect outweighs the income effect.","correct":false,"explanation":"The substitution effect is negative after a price rise, but it cannot explain an upward-sloping response by itself. The stronger negative income effect must be the decisive force."}]},{"id":"37adb4af-a082-418a-b7ce-e584dc71bc23","cardType":"basic","points":1,"front":"What happens to quantity demanded when the price of a Giffen good rises?","back":"Quantity demanded rises.","mcqOptions":[{"text":"Quantity demanded rises.","correct":true,"explanation":"For a Giffen good, the negative income effect from the price rise is stronger than the substitution effect. Consequently, consumers buy more even though the good has become more expensive."},{"text":"falls","correct":false,"explanation":"This is the usual law of demand and applies when the substitution effect dominates. For a Giffen good, the stronger negative income effect causes quantity demanded to rise instead."},{"text":"stays constant","correct":false,"explanation":"A constant quantity would mean the income and substitution effects exactly offset each other. Giffen behaviour occurs when the negative income effect outweighs substitution, producing a rise."},{"text":"first rises, then falls","correct":false,"explanation":"The standard Giffen model predicts a net rise in quantity demanded when price rises. It does not require a two-stage response; the dominant negative income effect determines the direction."}]},{"id":"3036724e-dfcb-4810-b6f2-6ddbdc627cd7","cardType":"basic","points":3,"front":"How are Giffen goods related to inferior goods?","back":"

Every Giffen good is inferior.
Very few inferior goods are Giffen goods.

","mcqOptions":[{"text":"

Every Giffen good is inferior.
Very few inferior goods are Giffen goods.

","correct":true,"explanation":"Giffen goods are a rare subset of inferior goods. Their negative income effect must be unusually strong and exceed substitution, whereas most inferior goods retain downward-sloping demand."},{"text":"

Every Giffen good is normal.
Very few normal goods are Giffen goods.

","correct":false,"explanation":"Giffen goods must be strongly inferior because their negative income effect outweighs substitution. They therefore belong within the inferior-good category, not the normal-good category."},{"text":"

Every inferior good is Giffen.
Very few Giffen goods are inferior goods.

","correct":false,"explanation":"This reverses the set relationship. All Giffen goods are inferior, but most inferior goods still have substitution effects that dominate, so only a very small number are Giffen."},{"text":"

No Giffen good is inferior.
Most inferior goods are Giffen goods.

","correct":false,"explanation":"Both claims reverse the relationship. Giffen goods necessarily have strong inferiority, while only a few inferior goods meet the additional condition that their income effect dominates substitution."}]},{"id":"6d3ae652-cc0d-4437-a331-94e7786ea69b","cardType":"basic","points":3,"front":"A good's price falls. Predict the direction of each effect for a normal good.","back":"

Substitution effect: quantity rises.
Income effect: quantity rises.

","mcqOptions":[{"text":"

Substitution effect: quantity rises.
Income effect: quantity rises.

","correct":true,"explanation":"A price fall makes the good relatively cheaper, so substitution increases its quantity demanded. For a normal good, the resulting rise in real income also increases demand."},{"text":"

Substitution effect: quantity falls.
Income effect: quantity falls.

","correct":false,"explanation":"Both directions are reversed. A lower relative price encourages consumers to substitute towards the good, and higher real income increases demand for a normal good."},{"text":"

Substitution effect: quantity rises.
Income effect: quantity falls.

","correct":false,"explanation":"The second direction applies to an inferior good. For a normal good, increased real income raises demand, so the income effect reinforces the positive substitution effect."},{"text":"

Substitution effect: quantity falls.
Income effect: quantity rises.

","correct":false,"explanation":"Although a normal good has a positive income effect, its substitution effect is also positive after a price fall. The good becomes relatively cheaper, encouraging substitution towards it."}]},{"id":"0426c13b-973c-413a-8c2c-3d1bcdfdc7dd","cardType":"basic","points":3,"front":"A good's price falls. Predict the direction of each effect for an ordinary inferior good.","back":"

Substitution effect: quantity rises.
Income effect: quantity falls.

","mcqOptions":[{"text":"

Substitution effect: quantity rises.
Income effect: quantity falls.

","correct":true,"explanation":"When the price falls, the good becomes relatively cheaper, so the substitution effect increases its quantity demanded. For an ordinary inferior good, the resulting rise in real income reduces demand, so the income effect lowers quantity."},{"text":"

Substitution effect: quantity falls.
Income effect: quantity rises.

","correct":false,"explanation":"This reverses both mechanisms. A lower relative price encourages substitution towards the good, while the higher real income associated with an inferior good reduces demand; therefore substitution raises quantity and income lowers it."},{"text":"

Substitution effect: quantity rises.
Income effect: quantity rises.

","correct":false,"explanation":"The first direction is correct, but the income effect is misidentified as positive. Inferior goods are demanded less when real income rises, so a price fall produces a negative income effect."},{"text":"

Substitution effect: quantity falls.
Income effect: quantity falls.

","correct":false,"explanation":"The negative income effect is correctly identified, but the substitution effect is reversed. A price fall makes the good cheaper relative to alternatives, encouraging consumers to substitute towards it."}]},{"id":"cbfafc93-67b1-44fa-8756-ebca263bb2da","cardType":"basic","points":2,"front":"A good's price falls. What happens to quantity demanded if it is Giffen?","back":"Quantity demanded falls, because the negative income effect dominates.","mcqOptions":[{"text":"Quantity demanded falls, because the negative income effect dominates.","correct":true,"explanation":"For a Giffen good, the good is strongly inferior and absorbs a large share of income. A price fall raises real income, reducing demand by more than the substitution effect increases it."},{"text":"Quantity demanded rises, because the substitution effect dominates.","correct":false,"explanation":"This describes the usual outcome for normal and ordinary inferior goods, where substitution towards a cheaper good outweighs the income effect. For a Giffen good, the negative income effect is stronger and demand falls."},{"text":"Quantity demanded falls, because the substitution effect dominates.","correct":false,"explanation":"A lower price creates a substitution incentive towards the good, so substitution cannot explain the fall. The quantity decreases because the unusually strong negative income effect outweighs that positive substitution effect."},{"text":"Quantity demanded rises, because the positive income effect dominates.","correct":false,"explanation":"Giffen goods have a negative, not positive, income effect because they are strongly inferior. When price falls, increased real income reduces demand, and this reduction exceeds the substitution effect."}]},{"id":"b614666f-afab-4b24-b791-5c6e314a8b5a","cardType":"basic","points":2,"front":"Why does a price rise cause a particularly large negative income effect for a Giffen good?","back":"The staple takes a large share of income, so the price rise sharply reduces real income.","mcqOptions":[{"text":"The staple takes a large share of income, so the price rise sharply reduces real income.","correct":true,"explanation":"A staple consuming much of the household budget has a substantial effect on purchasing power when its price changes. A price rise therefore causes a large fall in real income and demand."},{"text":"The staple takes a small share of income, so the price rise sharply reduces real income.","correct":false,"explanation":"A small budget share means a price change has only a limited effect on purchasing power. Giffen behaviour requires the staple to take a large share, making the negative income effect unusually powerful."},{"text":"The staple takes a large share of income, so the price rise sharply increases real income.","correct":false,"explanation":"A price rise reduces, rather than increases, consumers’ real income because their existing money buys fewer goods. The large budget share explains why this reduction is especially substantial."},{"text":"The staple takes a small share of income, so the price rise barely changes real income.","correct":false,"explanation":"Although a small budget share would make the real-income change small, that does not explain a particularly large negative income effect. The relevant condition is a large share of household income."}]},{"id":"ac48ea3b-5dd9-423d-8a9e-fdae76bf1614","cardType":"basic","points":2,"front":"Good X falls in price from £4 to £2. The substitution effect raises quantity from 3 to 4 units, and the income effect raises it to 5. What is the price effect?","back":"$$$\\text{PE} = (+1) + (+1) = +2\\text{ units}$$","mcqOptions":[{"text":"$$$\\text{PE} = (+1) + (+1) = +2\\text{ units}$$","correct":true,"explanation":"The substitution effect increases quantity by one unit, from 3 to 4, and the income effect adds another unit, from 4 to 5. Adding both changes gives a total price effect of +2 units."},{"text":"$$$\\text{PE} = (+1) + (-1) = 0\\text{ units}$$","correct":false,"explanation":"The income effect is stated to raise quantity from 4 to 5, so it is +1, not -1. Treating it as negative incorrectly cancels the positive substitution effect instead of producing +2 units."},{"text":"$$$\\text{PE} = (+2) + (+1) = +3\\text{ units}$$","correct":false,"explanation":"The total movement from 3 to 5 is two units. Counting the final quantity of five, or combining the initial three with the changes, creates an extra unit; the two effects sum to +2 units."},{"text":"$$$\\text{PE} = (+1) + (+1) = +1\\text{ units}$$","correct":false,"explanation":"Both component effects are +1, so they must be added to give +2. This option records the correct effect directions but makes an arithmetic error by reporting only one unit."}]},{"id":"c3baff0c-5cbc-449c-9d19-c89ddbd3d664","cardType":"cloze","points":null,"front":"A price change can be decomposed into a [ ] and an income effect.","back":"A price change can be decomposed into a substitution effect and an income effect.","mcqOptions":[{"text":"substitution effect","correct":true,"explanation":"A price change affects demand through two components: the substitution effect, caused by changed relative prices, and the income effect, caused by changed real purchasing power."},{"text":"income effect","correct":false,"explanation":"The income effect is already the second component named in the sentence. The missing component is the substitution effect, which reflects consumers switching between goods after a relative price change."},{"text":"price effect","correct":false,"explanation":"The price effect is the overall change in quantity demanded resulting from both components, rather than one component alongside the income effect. The missing term is the substitution effect."},{"text":"wealth effect","correct":false,"explanation":"Wealth effect is not the standard decomposition term used here and can suggest changes in assets rather than purchasing power. The conventional pair is substitution effect and income effect."}]},{"id":"c696a005-18e1-46f9-8be7-37bb359de557","cardType":"cloze","points":null,"front":"The substitution effect is shown as movement along the [ ].","back":"The substitution effect is shown as movement along the original indifference curve.","mcqOptions":[{"text":"the original indifference curve","correct":true,"explanation":"The substitution effect isolates the response to a changed relative price while holding utility constant. On an indifference-curve diagram, this means movement along the original indifference curve."},{"text":"the new indifference curve","correct":false,"explanation":"Movement to a new indifference curve represents the income effect, because changed purchasing power changes attainable utility. The substitution effect is shown along the original curve while utility is held constant."},{"text":"the original budget line","correct":false,"explanation":"A budget line represents affordable combinations, not equal-utility combinations. The substitution effect is measured along the original indifference curve, using the changed relative prices to identify the compensated choice."},{"text":"the new budget line","correct":false,"explanation":"The new budget line shows the consumer’s changed affordability after the price change, but it does not itself define the substitution effect. That effect is movement along the original indifference curve."}]},{"id":"220a9893-01c6-461a-b364-9e1aaa1bb457","cardType":"cloze","points":null,"front":"The income effect is caused by a change in [ ] and is shown by movement to a new indifference curve.","back":"The income effect is caused by a change in real income and is shown by movement to a new indifference curve.","mcqOptions":[{"text":"real income","correct":true,"explanation":"A price change alters what a given money income can buy, changing real income or purchasing power. The income effect is the resulting movement between indifference curves as attainable utility changes."},{"text":"money income","correct":false,"explanation":"The income effect in this decomposition does not require a change in the number of pounds received. It results from changed purchasing power, so the relevant concept is real income."},{"text":"relative prices","correct":false,"explanation":"A change in relative prices causes the substitution effect, encouraging consumers to switch between goods. The income effect instead arises because the price change alters real purchasing power."},{"text":"consumer preferences","correct":false,"explanation":"Preferences determine the shape and ranking of indifference curves but are assumed unchanged in this analysis. The income effect comes from a change in real income caused by altered purchasing power."}]},{"id":"8f9081ff-d689-4cbf-9a63-fa04b5f75d66","cardType":"cloze","points":null,"front":"For a normal good, the substitution effect and income effect [ ] each other.","back":"For a normal good, the substitution effect and income effect reinforce each other.","mcqOptions":[{"text":"reinforce","correct":true,"explanation":"For a normal good, a price fall raises quantity through substitution towards the cheaper good and through higher real income. Both effects move quantity in the same direction, so they reinforce each other."},{"text":"oppose","correct":false,"explanation":"The effects oppose one another for an ordinary inferior good, because higher real income reduces demand. For a normal good, both the substitution and positive income effects change quantity in the same direction."},{"text":"reverse","correct":false,"explanation":"The two effects do not reverse each other: a price fall makes the good relatively cheaper and also raises real income, with both changes increasing demand for a normal good."},{"text":"cancel","correct":false,"explanation":"Cancellation would require effects operating in opposite directions with equal sizes. For a normal good, the substitution effect and positive income effect point in the same direction and reinforce one another."}]},{"id":"5dd10813-8d66-4430-b8ba-28a8cb9bf88e","cardType":"cloze","points":null,"front":"For an ordinary inferior good, the substitution effect raises quantity but the income effect [ ] it.","back":"For an ordinary inferior good, the substitution effect raises quantity but the income effect lowers it.","mcqOptions":[{"text":"lowers","correct":true,"explanation":"A price fall raises real income. Because the good is inferior, consumers respond to that higher real income by reducing demand, so the income effect lowers quantity even though substitution raises it."},{"text":"raises","correct":false,"explanation":"A positive income response is characteristic of a normal good, not an inferior good. For an ordinary inferior good, the price fall increases real income and therefore reduces demand through the income effect."},{"text":"maintains","correct":false,"explanation":"The income effect is not zero for an ordinary inferior good. The price change alters real purchasing power, and the resulting increase in real income reduces demand for the inferior good."},{"text":"doubles","correct":false,"explanation":"The income effect describes the direction of the demand response, not a fixed numerical multiplier. For an ordinary inferior good, higher real income lowers quantity demanded, with the size depending on circumstances."}]},{"id":"602593f2-999a-4065-880b-ed33223f69bd","cardType":"cloze","points":null,"front":"A Giffen good's strong negative income effect [ ], causing quantity demanded to rise when its price rises.","back":"A Giffen good's strong negative income effect outweighs the substitution effect, causing quantity demanded to rise when its price rises.","mcqOptions":[{"text":"outweighs the substitution effect","correct":true,"explanation":"When the price of a Giffen good rises, substitution encourages consumers to buy less, but the large fall in real income makes them buy more of the staple. The latter effect dominates."},{"text":"is outweighed by the substitution effect","correct":false,"explanation":"This is the usual relationship for a normal or ordinary inferior good, where substitution determines the overall direction. Giffen behaviour requires the negative income effect to be stronger than substitution."},{"text":"reinforces the substitution effect","correct":false,"explanation":"For a price rise, the negative income effect for a Giffen good raises demand, while substitution lowers demand. Because these directions conflict, the effects cannot reinforce each other."},{"text":"has no effect on the substitution effect","correct":false,"explanation":"The two effects are conceptually separated, but the statement concerns which determines the overall quantity change. Giffen demand requires the negative income effect to dominate the opposing substitution effect."}]}]}],"examCountdown":null,"heading":"7.2.3 income, substitution and price effects for normal, inferior and Giffen goods","title":"7.2.3 income, substitution and price effects for normal, inferior and Giffen goods Flashcards","topbar":{"backHref":"/international-a-level/economics/cie/flashcards"},"topicSidebar":"$L3a"}]}],"topicId":"fe8c10c8-8d84-4542-a264-f7f1331bfc8c","walled":"$L3b"}],"$L3c","$L3d"]