The income effect describes changes in a consumer’s real income as a result of a shift in commodity prices. The replacement effect occurs when one product is substituted for another due to a change in their relative prices. There is movement along the income-consumption curve due to the income effect, whereas there is movement along the price-consumption curve due to the substitution effect.
When the price of a product rises, the income effect reduces disposable income, which reduces the amount desired; when the price falls, the substitution effect enhances the actual spending power of a consumer, allowing them to buy more with the budget available. On the other hand, an increase in the commodity price will cause customers to switch to other commodities because alternative commodities are comparatively cheaper; on the other hand, a decrease in price will make the commodity cheaper than its substitutes, attracting more customers and resulting in higher demand.