The knowledge of the concept of budget line is essential for understanding the theory of consumer's equilibrium. A higher indifference curve shows a higher level of satisfaction than a lower one. Therefore, a consumer in his attempt to maximise his satisfaction will try to reach the highest possible indifference curve. But in his pursuit of buying more and more goods [...]
We now proceed to derive from indifference curve analysis a law of demand which should state in general terms the relationship between price and quantity demanded of a good. In other words, we will try to derive a general demand theorem which describes the direction in which quantity demanded of the good will change as a result of a change [...]
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 [...]