The Tale of Two Choices: Substitution and Income Effects
Rahul and Aman were best friends, both working in the same office but with different lifestyles. Every morning, they grabbed a coffee on their way to work—Rahul always went for his favorite artisan latte (₹250), while Aman preferred a regular filter coffee (₹100). The Shock: A Price Hike! One day, the cafĂ© raised the price of artisan lattes from ₹250 to ₹350. Rahul frowned. “That’s expensive!” he thought. This is where Substitution and Income Effects kicked in. 1. The Substitution Effect: Since the artisan latte became more expensive , Rahul started considering alternatives. Instead of spending ₹350 daily, he thought, "Maybe I’ll switch to a filter coffee like Aman—it’s much cheaper and still gives me my caffeine fix!" 🔹 Substitution Effect: When the price of a good increases, people look for cheaper alternatives (substitutes). 2. The Income Effect: Rahul also realized that his purchasing power had decreased —even though his salary was the same, he now had less money lef...