Final answer:
The substitution effect causes a consumer to buy less of a good with a higher price and more of a cheaper alternative, while the income effect results from changes in purchasing power due to the price change. For normal goods, both effects usually lead to less consumption when prices increase, but for inferior goods, an increase in price can lead to more consumption due to the income effect.
Step-by-step explanation:
When the price of a good changes, consumers adjust their consumption both because of the substitution effect and the income effect. The substitution effect describes the tendency of consumers to consume less of a good with a relatively higher price and more of a good with a relatively lower price. For a normal good, when prices increase, the substitution effect will typically cause consumers to substitute the good with a less expensive alternative. Meanwhile, the income effect reflects the change in a consumer's purchasing power due to the price change; for normal goods, an increase in price makes consumers feel poorer, leading to a reduction in the quantity consumed. Conversely, for an inferior good, an increase in price may lead to an increase in consumption due to the income effect, as consumers might not have the financial flexibility to substitute the inferior good with more expensive alternatives.
Let's consider an example. If the price of baseball bats rises, we expect Sergei to buy fewer bats (substitution effect) because bats are now more expensive relative to other goods. Furthermore, even though Sergei's income hasn't changed, the higher price of bats reduces his effective purchasing power (income effect), prompting him to buy fewer bats if they are a normal good. If bats were an inferior good, Sergei might end up buying more bats if his reduced buying power pushes him towards purchasing more of the less expensive inferior good.