#6-revisiting-demand-function #cfa #cfa-level-1 #economics #has-images #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #study-session-4
Mental exercise: Part of his response is because of the increase in real income. We remove that effect subtracting some income, while leaving the new lower price in place. That budget constraint shows the reduction in income that moves him back to his original indifference curve.
Notice that we are moving BC2 inward, parallel to itself until it becomes just tangent to his original indifference curve at point b. The price decrease was a good thing for him. An offsetting bad thing would be an income reduction. If the income reduction is just sufficient to leave him no better or morse than before the price change, we have removed the real income effect of the decrease in price.