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 [...]
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 [...]