IC 4 - Indifference Curve (advanced): Price Effect = Income + Substitution Effects

Описание: Indifference curve analysis: Highest welfare is reached at the point of tangency between the indifference curve and the budget line.

Consumer Choice. The effect of a price change on the quantity of the good consumed is called the price effect.
Price Effect = Substitution Effect + Income Effect

The substitution effect is the effect of a change in price on the quantity bought when the consumer remains on the same indifferent curve.

For a normal good, the income effect reinforces the substitution effect
For an Inferior good, the income effect is negative and works against the substitution effect. And as long as the substitution effect dominates, the demand curve still slopes downward.