The income effect and substitution effect play integral roles in consumer decision-making influenced by price changes.
Income effect: This effect occurs when a change in the price of a good leads to a change in the consumer's purchasing power or buying power, influencing their consumption of goods and services.
Substitution effect: Contrary to the income effect, this effect happens when a price change prompts consumers to adjust their consumption by substituting towards goods that are relatively cheaper.
Price elasticity: This concept is crucial in understanding how responsive consumer demand is to changes in price, affecting consumer behavior and market dynamics.
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