= 
substitution
effect + 
income
effect.Income and Substitution Effects
The inverse relationship between price and quantity demanded results from both an income effect and a substitution effect. A change in price causes a change in both the relative price of the product and the purchasing power of the consumer’s income. In algebraic terms, we can write:
= substitution
effect + income
effect.
Consider the second term.
It can be rewritten as 
income
effect = 
.
That is, the income effect is the product of two terms. A price increase reduces
the consumer’s purchasing power by 
dollars;
each one of these dollars reduces the quantity demanded by 
units.
For example, consider an
individual who is currently purchasing four compact music discs per month. How
would we measure the income effect of a $1 increase in the price of CDs? Each
of these four discs now costs $1 more, so our consumer will be spending $4 more
each month on CDs. This reduces her purchasing power by $4. In general,
each dollar increase in the price will reduce purchasing power by an amount
equal to the quantity demanded: 
= -Qd. Substituting this into our formula, we can write:
= 
substitution
effect -Qd
.
You will note that the first term is always negative-an increase in price will
cause substitution away from the product. As long as consumers buy less of the
good when income decreases (
> 0), the second term will also be negative because of the minus sign in
front of Qd. The income and substitution effects work together
to reduce quantity demanded.