📊 Income and Substitution Effects
Decompose price changes into substitution and income effects — step by step
Initial equilibrium: consumer at Point A.
| Point | Coffee (cups/wk) | Food (units/wk) | Description |
|---|---|---|---|
| A (Original) | — | — | Original equilibrium |
| B (Compensated) | — | — | Same utility, new prices |
| C (Final) | — | — | New equilibrium |
🔑 Key Concepts
- Point A — Original optimum: tangency of original budget line and indifference curve.
- Price change — The budget line pivots; the consumer moves to a new optimum (Point C).
- Substitution Effect (A→B) — Holding utility constant, the consumer shifts toward the relatively cheaper good.
- Income Effect (B→C) — The real income change from the price change shifts the consumer from B to the final choice C.