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#6-revisiting-demand-function #cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #study-session-4
An important thing to notice is that the pure substitution effect must always be in the direction of purchasing more when the price falls and purchasing less when the price rises. This is because of the diminishing marginal rate of substitution, or the convexity of the indifference curve.
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6. REVISITING THE CONSUMER’S DEMAND FUNCTION
income effect. Exhibit 16. Substitution and Income Effects for a Normal Good Note: Substitution effect (Q a to Q b ) and the income effect (Q b to Q c ) of a decrease in the price of a normal good. <span>An important thing to notice is that the pure substitution effect must always be in the direction of purchasing more when the price falls and purchasing less when the price rises. This is because of the diminishing marginal rate of substitution, or the convexity of the indifference curve. Look again at Exhibit 16. Note that the substitution effect is the result of changing from budget constraint 1 to budget constraint 3—or moving the budget constraint along the original


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