Income and Substitution Effect Calculator

Problem → model → reason → result

What problem does this model solve?

Decompose a quantity change into substitution and income effects using a compensated quantity.

Why does the model apply?

The compensated quantity represents the bundle chosen after the relative-price change while holding purchasing power or utility constant, depending on the decomposition method used.

What assumptions does it make?

The variables must describe the same market, firm, period or decision context and use consistent units. Any behavioural condition implied by the formula—such as other factors remaining unchanged—must be reasonable for the question being asked.

Formula

Substitution effect = Compensated Q − Initial Q; Income effect = Final Q − Compensated Q

Calculation and working

The calculator substitutes your inputs locally and displays the numerical result. Change one input at a time to test which relationship drives the result.

What does the result mean?

Interpret the result in the economic context named above, including its sign, magnitude, units and time period. A calculated relationship is not by itself evidence that one variable caused another.

Worked example

If quantity moves from 10 initially to 14 when compensated and 16 finally, the substitution effect is +4 and the income effect is +2.

When does this model not apply?

Do not use the result when the input definitions, units or formula assumptions do not match the real situation. This is an educational model, not financial, investment, tax or policy advice; verify material decisions against primary data and professional guidance.