How the price effect can be decomposed into income effect and substitution effect is is explained by the methods below: 1. Decomposing Price Effect: Compensating Variation in Income: In the method of decomposing price effect by compensating variation we adjust the income of the consumer so as to offset the change in satisfaction and bring the consumer back to his [...]
The effect of changes in income on purchases or consumption of a good. An important factor responsible for the changes in consumption of a good is the substitution effect. Whereas the income effect shows the change in the quantity purchased of a good by a consumer as a result of changes in his income, prices remaining constant, substitution effect means [...]
In this article we will discuss about the properties of an income consumption curve in different situations, with the help of suitable diagrams. With a given money income to spend on goods, given prices of the two goods and given an indifference map (which portrays given tastes and preferences of the consumers), the consumer will be in equilibrium at, point [...]