Consumption fell from V0 to VN when the price of videos rose from PV1 to PV2. Part of that reduction was due to the substitution effect because videos are now relatively more expensive than other products. Our consumer may buy more DVDs or go to movie theaters more often, or even buy books.

    Because she also feels poorer due to the price increase, her consumption will be altered by the income effect. The direction of the income effect will depend on whether, to our consumer, videos are normal or inferior goods. The total change in consumption due to both effects is V0 - VN and labeled Total on the graph.

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