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it comes from.
It's parallel to the new
budget constraint.
That is it's got the new
marginal rate of
transformation, the new slope,
but it's tangent to the old
indifference curve.
That gets you to point B. And so
the movement from A to B is
the substitution effect.
Then we have an income effect
which is, in fact, utility
isn't held constant when
prices change.
In fact, utility falls, because
you're effectively poorer.
You're effectively poorer.
Utility is falling.
And since you're effectively
poorer, that further reduces
demand if the good is normal.
So if it's a normal good, if
it's a good where lower income
causes less consumption of
it, the fact that you're
effectively poorer further
lowers the consumption from
point B to point C.
So the total price effect is the
one we demonstrated at the
beginning of the last lecture.
We raised the price of movies
from $8 to $12.
And we saw the number
of movies consumed
fell from 6 to 4.
But what we can see now to
understand what's underneath
that is two things, an effect of
the fact that prices change
holding utility constant,
and the fact that you're
effectively poorer.
And that's the key thing.
No, your income hasn't
actually gone down.
But that $96 your parents gave
you can buy you less.
Your opportunity set has
been restricted.
And that makes you effectively
poorer.
And so you buy less
for that reason.
And so you get the total
movement from A to C.
Now, as we emphasized last time,
this will be the case if
it's a normal good.
So substitution effects
are done.