Final answer:
The income effect describes a reduction in quantity demanded due to the diminished buying power of consumers following a price increase, while the substitution effect occurs when consumers switch to cheaper alternatives.
Step-by-step explanation:
The income effect refers to the change in consumption resulting from a change in real income. This effect describes how the increase in the price of a good, such as salmon, can diminish the buying power of a consumer's income, leading them to buy less of that good, assuming all other factors remain constant. In contrast, the substitution effect occurs when consumers replace a more expensive good with a less costly alternative.
Whenever there is a price change, these two effects work in tandem. If the price of salmon goes up, not only might consumers buy less salmon due to the reduced buying power (income effect), but they might also switch to a less expensive type of fish or protein source (substitution effect).
Understanding these concepts is important in economics because they explain consumer behavior in response to changes in price levels and how that impacts demand for particular goods.