In order to examine these two effects we need to separate them, so that they can be viewed individually. It turns out that the simplest way to do this is to remove the income effect first, allowing us to view the pure substitution effect.

   To remove the income effect we need to compensate our consumer for the fact that the price increase left her with reduced spending power. Restoring her spending power means that any remaining change in consumption is pure substitution effect.

Copyright © 1995-2004, Inc. - All Rights Reserved