The Substitution Effect

Given a constant money income, a change in the relative prices of two goods may force a consumer to rearrange his purchases. He may re-arrange his purchased of the tow goods in such a way that his satisfaction remains the same. This is known as the substitution effect. This substitution effect refers to the change […]

The Income Effect

The effect of a change in the consumer’s income on his total satisfaction is known as income effect. A consumer will be able to enjoy more or less satisfaction when his income increases or decreases assuming that the prices of goods he purchases remain constant. Every increase in income brings him down to a lower […]

Consumer’s Equilibrium

A consumer shall be in equilibrium where he can maximize his utility, subject to his budget line are target to each other (i.e. where their shapes are equal, the consumer would be in equilibrium as that combination of the goods X and Y gives maximum satisfaction to the consumer that is, this is the highest […]