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I just want to confirm with my understanding.

It is correct to say that no matter price increase or price decrease, the substitution effect is always negative for both inferior goods and normal goods. Then for income effect, it is positive for inferior goods and negative for normal goods no matter price increase or decrease.

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The income effect is negative for normal goods and positive for inferior goods. That is, you buy more normal goods when you are richer and less inferior goods.

In contrast, the substitution effect is negative when price increases and vice-versa. It always moves opposite to the price sign.

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  • $\begingroup$ The substitution effect should also be negative when price decreases as well. The direction that price moves doesn't change the direction of the sign of the effect. $\endgroup$ – Lee Sin Nov 11 '16 at 19:58
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    $\begingroup$ @LeeSin Then how come in your answer you write "The substitution effect is negative for normal goods with respect to changes in relative prices." Why is there a need for "with respect to" if the sign is constant? -1 to you for the hypocrisy of downvoting this answer. $\endgroup$ – Giskard Nov 11 '16 at 20:31
  • $\begingroup$ @denesp If you're going to say the income effect is negative always, then saying that the substitution effect is positive when price increases is inconsistent. If the answer had been one way or the other imo it would be correct if it had been consistent either way. $\endgroup$ – Lee Sin Nov 11 '16 at 20:47
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    $\begingroup$ @LeeSin No one is saying what you write in your comment... $\endgroup$ – Giskard Nov 11 '16 at 22:10
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You are correct on the main point. The effect is the derivative of the demand with respect to its argument (price or income), the sign of which does not depend on what the size or sign of the change in the argument is.

You did make a mistake: the income effect is positive for normal goods, negative for inferior goods.

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  • $\begingroup$ The income effect is not positive for normal goods in relation to a price change (the op's question). $\endgroup$ – Lee Sin Nov 11 '16 at 19:59

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