price change effect on consumption - broken down into 2 parts

• prices change >> income, prices both change relatively
• substitution effect - price changes >> relative prices of good changes
  • willing to buy more of good that became relatively cheaper
  • price change for 1 good relatively effects the other good as well
  • utility stays constant, price declines >> demand increases
  • causes shift along indifference curve (to point where more of one good bought than before)
• income effect - price falls >> relative income increases >> increase in real purchasing power
  • price held constant (as if income increased), quantity demanded depends on whether good is inferior/normal
  • outward or inward shift to new demand curve
  • inferior good >> inward shift >> may or may not overtake substitution effect
  • may be large enough to cause demand to slope upward (stop consuming some other good completely

• substitution effect
• indifference curve
• initial budget line
• new, relative budget line
• though the absolute price of good 2 doesn't change, a price decrease for good 1 makes good 2 relatively more expensive >> new relative budget line

• income effect
• price decrease for good 1 leads to an overall increase in purchasing power
• new budget line shifts outward from relative budget line found in last step
• negative income effect >> inferior good
• Giffen good - causes demand curve to slope upward due to very large income effect (very rare)

• overall change
• as expected, a price decrease for good 1 leads to more of good 1 and less of good 2 being bought