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Substitute effects are
always negative,
nothing fun about that.
Income effects are a little
more interesting, because
goods can be not normal
but inferior.
We have inferior goods which
are ones such that they're
crummy stuff that as your
income goes up, you
want less of it.
And that can change
the analysis.
So if we look at Figure 7-2,
now we're talking about the
price change with an
inferior good.
And now imagine someone
choosing
between steak and potatoes.
So now the choice is between
steak and potatoes.
And steak costs $5 a pound,
initially, and potatoes cost
$1 a pound.
Initially, you have
an income of $25.
So someone has an income
of y equals $25.
The price of steak is $5, and
the price of potatoes is $1.
So your budget constraint, your
original BC1, runs from
you can either have 5 steak, or
25 potatoes, or something
in between.
And so individuals choose
point A where they're
consuming 8.3 potatoes.
They choose point A.
I don't know what the
number of steaks is.
We probably also ought to label
that, the number of
steaks that comes from that.
But whatever.
It comes out of the
utility function.
So then we say, now let's
imagine that the price of
potatoes rises to $3 a pound.
There's a blight on the potatoes
like there was in
Ireland in the 1800s.
There's a potato blight, and
that shifts in the supply
curve for potatoes raising the
price of potatoes from $1 a
pound to $3 a pound.
Now, what we know is that that
will move consumers, given the
utility function that we've