Chapter 3

Behavior of Consumers’ Theory

 Learning intentions
 discuss the concept and axioms of “consumer preferences”
 discuss the concept of “Utility” and approaches of measuring
Utility (Cardinal and Ordinal approaches)
 define the meaning of total utility and marginal utility
 calculate total utility and marginal utility
 explain diminishing marginal utility
 explain the equi-marginal principle
 define the meaning of an indifference curve and a budget line
 explain the causes of a shift in the budget line
 Consumer Preferences
• Consumers makes choices by comparing consumption bundles (a
complete list of goods & services that are available for choice by the consumer).
– The description of when, where and under what circumstances the
consumption bundles would become available should be known.

Eg. Let’s limit our attention to a simple choice problem:

– Say our consumption bundle consists of two goods, 𝑥1 , 𝑥2 where 𝑥1 is the
amount of one good and 𝑥2 is the amount of the other good. We can
denote the complete consumption bundle 𝑥1 , 𝑥2 by X
– And another consumption bundle 𝑦1 , 𝑦2 denoted by Y
 Consumer Preferences
The consumer can rank the two consumption bundles as to their
desirability.
X ≻ Y ----------- Strictly preferred
X~Y ----------- Indifferent
X ⪰ Y ----------- Weakly prefers
 If X ⪰ Y and Y ⪰ X, we can conclude that X ~Y
 If X ⪰ Y but we know that it is not the case that X~ Y, we
can conclude that X≻Y
Assumptions (axioms) of consumer preference

These assumptions are basically made to ensure consistency in

consumer preference.
Eg. it is contradictory to say (x1, x2) > (y1, y2) and at the same time
(x1, x2) < (y1, y2) or vice versa.

• Complete: any two bundles can be compared. i.e. the consumer can
rank his preference or is able to make choice between any two
bundles.
• Reflexive: we assume that any bundle is at least as good as itself;
(x1, x2) ≥ (x1, x2).
• Transitivity: if (x1, x2) ≥ (y1, y2) and (y1, y2) ≥ (z1, z2), then we
assume that (x1, x2) ≥ (z1, z2).
 The concept of utility
• Utility is a way to describe preferences. It is a measure of the
level of happiness/pleasure/satisfaction that someone
receives from the consumption of a good/service.
Utility assumes that satisfaction can be measured in units, in the
same way that the actual goods consumed can be determined.

• A utility function is a way of assigning a number to a

consumption bundles such that more preferred bundles get
assigned larger number than less-preferred bundles.
 The concept of utility
• Given any two consumption bundles X and Y, the
consumer definitely wants X than Y if and only if the
utility of X is better than the utility of Y.
• Note:
– Utility’ and ‘Usefulness’ are not synonymous
– Utility is subjective
– Utility can be different at different places and time
 Two important measures of satisfaction are:

1. Total Utility (TU) is the overall/total satisfaction that is

derived from the consumption of all units of a good over a
given time period.
2. Marginal Utility (MU) is the additional/extra utility derived
from the consumption of one more unit of a particular good.
∆𝑇𝑈
i.e. MU = = the slope of the TU curve
∆𝑄
where, ∆𝑇𝑈 is the change in total utility, and ∆𝑄 is the change in the amount
of product consumed.
Eg. if someone gets 10 units of satisfaction from consuming one piece of pizza
and 15 units after consuming two pieces of pizza, then the marginal utility is 5
units.
 Total and marginal utility

• Consider the following

Total and marginal utility curves

Total utility: first increases,

reaches its maximum
and then declines as the
quantity consumed increases.

Marginal utility: is positive at

first (but keeps declining)
becomes zero and then
negative.
Exercise: Suppose you are revising for a mock examination.
Table 30.1 below shows the improved knowledge or utility you have obtained
for each of the seven days spent on revision.
Days Total knowledge Improved knowledge
1 20
2 33
3 42
4 48
5 52
6 55
7 57
1. Calculate the marginal utility (improved knowledge) as the number of
days increases.
2. Draw the total utility (Total knowledge) and marginal utility (Improved
knowledge) curves. (Put ‘utility/Knowledge’ on the vertical axis and ‘days’
on the horizontal axis).
3. What might this say to you about how you could plan your revision?
 Approaches of measuring utility
The Cardinalist school The Ordinalist school
• pioneered by Alfred Marshall, • pioneered by Prof John R Hicks, most often
promoted by classical and Neo- propounded by modern economists
classical Economists.
• measures utility subjectively. They believe
• measures utility objectively using that utility being the psychological
utils. i.e. it is possible to express phenomenon cannot be measured
utility/satisfaction that an individual theoretically, quantitatively and even
derives from consuming a commodity cardinally. (satisfaction cannot be measured
in quantitative terms/cardinal numbers numerically in the form of 1, 2, 3 … )
such as 1, 2, 3, 4, 5, 6 and so on
Limitations
It is more realistic as it relies on qualitative
• The assumption of cardinal utility is measurement.
doubtful/Less realistic as quantitative
measurement of utility is not possible /
Consumer can only rank/order the utility s/he
utility may not be quantified (Utility cannot derives from the consumption of different
be measured absolutely (objectively). products as 1st, 2nd, 3rd, etc.
• The assumption of constant MU of money is
unrealistic because as income increases, the
marginal utility of money changes.
 The cardinal utility theory
Measurement:
• Utility is measurable by arbitrary unit of measurement (utils. i.e.
the word crafted by Léon Walras ). Utils help in understanding
how much utility is derived from consumption of a product.
• also assumes that the utility derived from one unit of the
commodity is equal to the amount of money, which a consumer is
ready to pay for it (1 Util=1 Unit of money).
• Cardinal approach brings out the preference of one product over
other through Utils but this does not imply any conclusion or
relation between the choices.
 The cardinal utility theory
Basis:

• The cardinal utility is based on marginal utility analysis.

Example: Donald Trump submits that Burger gives him 60 Utils of

satisfaction whereas Pizza gives him only 40 Utils.
 Assumptions of the cardinal utility theory
 Rationality of consumers (utility maximizer - select the option that will
bring the most satisfaction to them).
 Utility is cardinally measurable.
 Constant marginal utility of money (This assumption is critical
because money is used as a standard unit of measurement of utility).
 Diminishing marginal utility.
 The total utility of a basket of goods depends on the quantities of the
individual commodities.
It is assumed that consumers derive satisfaction through consumption
of one good at a time.
The law of diminishing marginal utility (LDMU)

• LDMU states that as consumption of a good increases, the

marginal utility will get smaller (utility derived from each
successive unit decreases). i.e., the extra satisfaction that a
consumer derives declines as s/he consumes more and more
of the product in a given period of time. i.e. Assuming:
– The consumer is rational
– The consumer consumes identical or homogenous product (similar
quality, color, design, etc.)
– There is no time gap in consumption of the good
– The consumer taste/preferences remain unchanged
An example of the principle or law of diminishing marginal utility
Suppose you were hungry and wanted a
slice of pizza. How much would you pay for
it?
• Let us say you paid $2 for one slice.
• If you were still hungry, how much
would you pay for a 2nd slice of pizza?
You might be willing to pay slightly less
than what you paid for the 1st slice,
perhaps $1.50.
• If you wanted a third slice, you might be
prepared to pay less still, perhaps $1.25.
This is because the satisfaction or utility
you derived from consuming a further
piece of pizza has decreased as your
consumption increases.
• It can also be applied to a situation where a consumer sees an
item on sale at a price less than expected. The consumer is
likely to buy the item. But if an item is priced at more than the
expected price, a consumer will be unlikely to buy the item at
this time. Both consumers are linking the item’s utility with
the actual price at the point of sale.
 Limitations of marginal utility theory and
assumptions of rational behaviour
• Marginal utility theory assumes that
– consumers are capable of putting their wants in rank order and
assigning a value to the satisfaction gained from their consumption.
– The law of diminishing marginal utility further assumes that
consumers act and behave in a rational way in their purchasing
decisions.
• Empirical or real world evidence consistently shows other factors apart
from utility that determine what we purchase.
– To understand the behavioural factors involved requires being aware
of what people are thinking to determine and then model these
psychological influences.
 ECONOMICS IN CONTEXT
Are Black Friday events what they claim to be?
Discuss in a pair or a group:
1. Why do you think that more countries are holding Black
Friday events?
2. What are the benefits to consumers, retailers and
manufacturers of a Black Friday event?
3. Is the French government justified in seeking to ban Black
Friday events?
 Publicity from the US appears to have led to an increasing number of
retailers joining in the event.
 Consumers: money-saving offers are an opportunity to buy things that
they have been saving for; they could be tempted into buying things they
do not need or cannot afford. Retailers; can get rid of unsold stock,
especially seasonal stock; clears space in stores for Christmas items;
opportunity to generate a cash flow. Manufacturers: sell off old stock of
last year’s models, especially electronic goods; promote products which
might be bought later by consumers.
 In France, the prospects of civil disturbance would seem to be important.
Consumers may feel that they are losing out on the chance of a bargain.
Longer term the ban may lead to a more even sale of goods – this is likely
to be beneficial for manufacturers and retailers.
 The ordinal utility theory
Measurement:
• Utility is measured in terms of ranking of preferences of a
commodity when compared to each other.
A consumer can tell subjectively whether a product derives
more/less/equal satisfaction when compared to another.
Ordinal utility approach gives a sense of preferences (likes and
dislikes) and is used in grading the preferences of consumer
depending upon the alternatives that are available to him or her.
 The ordinal utility theory
Basis:
• The concept of ordinal utility is based on indifference curve
analysis. The indifference curve assumes that the utility can
only be expressed ordinally.

Example: Donald Trump submits that he gets more satisfaction

from Burger as compared to Pizza.
 Assumptions of the ordinalist approach
 The consumer is a rational being who aims at maximizing his level of
satisfaction for given income and prices of goods and services, which he
wish to consume.
 Utility is ordinal.
 Diminishing marginal rate of substitution.
 The consumer is expected to make decisions that are consistent with his
objective (Consumer’s preferences are consistent/transitive )
 Total utility of a consumer is measured by the quantities of all items
he/she consumes from his/her consumption basket.
a consumer may derive satisfaction from the consumption of a combination
of goods and services.
the consumer has not reached the saturation point of any commodity and
hence he prefers larger quantities of all commodities.
 Indifference set
Indifference set/schedule:
• Shows a combination of goods for which the consumer is indifferent /
shows the various combinations of goods from which the consumer
derives the same level of satisfaction.

Indifference schedule
 Indifference curve and map
• Consumer preferences can be • An indifference map - is a set of
represented by indifference curves indifference curves / a diagram
(IC). An IC graphically shows all of showing a number of different
the different combinations of two indifference curves.
goods that give the consumer
equal satisfaction or utility.
 Indifference curves
• a change in price of a good causes a movement along the
demand curve. An individual’s demand curve therefore is a
reflection of a consumer’s preferences.

• However, it does not always follow that consumers will buy

more of a good when its price falls. Consumers will only buy a
particular good if it is something that they actually want or
prefer when having to choose between alternatives.
 ECONOMICS IN CONTEXT
(consumer tastes differ)
Why the Oreo cookie was changed for the
Chinese biscuit Market
Discuss in a pair or a group:
1. Choose another product from a multinational company that
is widely on sale in your country (e.g. McDonalds, KFC,
Nescafé, Cadbury’s Dairy Milk). Consider the product’s
appeal to consumers in your country.
2. Now choose a similar product made by a domestic producer
in your own country. Think about its appeal. Compare the
appeal of the two products and consider whether this has
anything to do with economics.
 Properties of indifference curves (ICs)
 Higher ICs represent higher levels of satisfaction; consumers are being
rational when preferring to be on a higher and not a lower IC ( A rational
consumer will always opt for the highest IC).

 ICs never cross each other (cannot intersect) as this would be where a
consumer was being irrational in the choices being made. As a result the
consumer would not get the maximum possible amount of satisfaction.

 The slope of the IC is important – it represents the extent to which the

consumer is willing to substitute one good for another. The rate at which the
consumer is willing to substitute one good for another is known as the
marginal rate of substitution.
– ICs have negative slope (slopes downwards to the right to indicate that a
fall in the quantity consumed of a good is accompanied by an increase in
the consumption of the other good, given the same level of satisfaction).
– ICs are convex to the origin (because of diminishing marginal rate of
substitution).
 Marginal rate of substitution (MRS)
• Marginal rate of substitution is a rate at which consumers are willing to
substitute one commodity for another in such a way that the consumer
remains on the same level of satisfaction.
• Marginal rate of substitution of X for Y is defined as the number of units of
commodity Y that must be given up in exchange for an extra unit of
commodity X so that the consumer maintains on the same level of
satisfaction (IC curve).

Since one of the goods is scarified to obtain more of the other good, the MRS
is negative.
 MRS…
• Consider the following IC: Calculate 𝑀𝑅𝑆𝑋,𝑌 as we move from point
A to B, B to C and C to D
20−30
• A to B, 𝑀𝑅𝑆𝑋,𝑌 = = −2
10−5
12−20
• B to C, 𝑀𝑅𝑆𝑋,𝑌 = = −1.6
15−10
8−12
• C to D, 𝑀𝑅𝑆𝑋,𝑌 = = −0.8
20−15

For the same increase in consumption of

good X, the amount of good Y the
consumer is willing to scarify diminishes
implying the principle of diminishing
marginal rate of substitution.
 MRS…
• Given a utility function: 𝑼 = 𝒇(𝑿, 𝒀), MRS can be derived as
follows:

where 𝑀𝑈𝑋 is marginal utility of X and 𝑀𝑈𝑌 is the marginal

utility of Y
 MRS…
• Example 1: Suppose a consumer‘s utility function is given
by U X, Y = 𝑋 4 𝑌 2 . Find 𝑀𝑅𝑆𝑋,𝑌

• Example 2: Suppose a consumer‘s utility function is given

by U X, Y = 𝑋 5 𝑌 3 . Find 𝑀𝑅𝑆𝑌,𝑋
 Limitations of the model of indifference curves

• The indifference curve model aims to provide a simple representation of reality.

• Here used to explain consumer behaviour when there are two goods and consumer
income is fixed. With these assumptions, it is reasonably straight forward for a consumer
to be indifferent to the combinations of the two goods that will provide a particular level
of satisfaction.
There are three main limitations to the indifference curve model:
 In reality, consumers have to choose from many more goods than just two.
 The term ‘indifference’ implies that consumers are willing to accept any combination of
the two goods as represented by an indifference curve. Some point out that consumers
express their wants & needs in terms of preference or rank order, and not indifference.
 Indifference curves assume that consumers act rationally. This is not always true.
 Budget Constraint
• To develop the budget constraint /budget set of the
consumer we need assumptions:
– There are only two goods bought in quantities, say, X and Y.
– Each consumer is confronted with market determined prices,
𝑃𝑋 and 𝑃𝑌 .
– The consumer has a known and fixed money income (M).

• Thus the budget constraint of the consumer is given by:

𝑷𝑿 𝑿 + 𝑷𝒀 𝒀 ≤ 𝑴
 Budget set and line
• Budget set: the set of affordable bundles given prices (P1 and P2)
and income M.
• Budget line: the set of bundles that cost exactly M.
i.e. 𝑷𝑿 𝑿 + 𝑷𝒀 𝒀 = 𝑴
A budget line shows numerically all the possible combinations of two
goods that a consumer can purchase with a given income and given
prices of the two goods.
To draw a budget line we have to consider the two extreme income
and expenditure relationship,
i.e. identify vertical and horizontal intercept as well as slope.
 Budget line
• Any bundle on or within the
budget line is affordable.
Y
𝑀 • Any bundle outside the
𝑃𝑌 budget line is unaffordable.
−𝑃𝑋
Slope = 𝑃𝑌
• The budget line has
negative slope because in
order to consume more of
good X, we have to
consume less of good Y and
X
vice versa to satisfy the
𝑀
budget constraint.
Budget set 𝑃𝑋
 Examples
Example 1: A consumer has 100 birr to spend on two goods X
and Y with prices 3 birr and 5 birr respectively. Derive the
equation of the budget line and sketch the graph.
Solution
Budget equation: 3X +5Y = 100
Intercepts: when Y=0, X=M/P1= 100/40= 33.4
when X=0, Y=M/P2= 100/5=20
Slope: −𝑃1 𝑃2 = -3/5

Example 2: Let M= 200, p1=2,p2=4, Derive the budget

equation and draw a budget line.
Suppose a person has $200 to spend on two goods, X and Y.
Assume the price of Y is $20 and the price of X is $10.

Possible combinations that can be purchased.

Each of the combinations costs $200 in total.

Quantity of Y Quantity of X
($20 each) ($10 each)
10 0
9 2
8 4
7 6
6 8
5 10
4 12
3 14
2 16
1 18
0 20
 Determinants of the budget line
 Consumers are restricted in what they are able to buy due to
their limited disposable income and the prices of goods.

 The budget line changes if one of the following changes:

1. The consumers income
2. The prices of goods
3. Taxes, subsides and rationing
 Optimal choice/Equilibrium of the consumer

• Given limited income that the consumer has and the

price level of goods and services, what combination
of goods and services should s/he consume so as to
get the maximum total utility?

– Based on the cardinal approach of utility

– Based on the ordinal approach of utility
 Optimal choice in cardinal approach
a) The case of one commodity
The equilibrium condition of a consumer that consumes a single good X
occurs when the marginal utility of X is equal to its market price.
i.e. 𝑴𝑼𝑿 = 𝑷𝑿

b) The case of two or more commodities

The consumer’s equilibrium is achieved when
• the marginal utility per money spent is equal for each good purchased
𝑴𝑼𝑿 𝑴𝑼𝒀 𝑴𝑼𝑵
i.e. = =⋯= and
𝑷𝑿 𝑷𝒀 𝑷𝑵
• the money income available for the purchase of the goods is exhausted
i.e. 𝑷𝑿 𝑸𝑿 + 𝑷𝒀 𝑸𝒀 + … + 𝑷𝑵 𝑸𝑵 = 𝑴
… cont.
 The equi-marginal principle
• used to determine whether or not consumer equilibrium is being achieved. A
consumer is said to be in equilibrium when it is not possible to switch any
expenditure from, for example, product X to product Y to increase total utility.
𝑴𝑼𝑿 𝑴𝑼 𝑴𝑼
i.e. = 𝒀=⋯= 𝑵
𝑷𝑿 𝑷𝒀 𝑷𝑵

• Where the equi-marginal principle applies, it is not possible to increase utility

by reallocating expenditure between any of the products that are available.
• Consumers maximize utility where their marginal valuation for each product
consumed is the same. A consumer has therefore allocated income in a way
that has maximised utility, resulting in consumer equilibrium.
• The equi-marginal principle is based on the following assumptions:
– consumers have limited incomes
– consumers will always behave in a rational manner
– consumers seek to maximise their utility.
 Optimal choice - cardinal approach
• Example: Suppose Saron has 7 Birr to be spent on two goods: banana and
bread. The unit price of banana is 1 Birr and the unit price of a loaf of
bread is 4 Birr. The total utility she obtains from consumption of each good
is given below.
Two products, x and y, are priced at $1 and $2 respectively.
It is assumed that a consumer has $10 to spend.

Quantity Product x ($1 each) Product y ($2 each)

TU MU MU/P TU MU MU/P

1 60 42

2 100 74

3 125 98

4 137 106

5 139 120

6 141 123
 Consumer equilibrium
Two products, x and y, are priced at $1 and $2 respectively. It is
assumed that a consumer has $10 to spend.
Quantity Product x ($1 each) Product y ($2 each)
TU MU MU/P TU MU MU/P
1 60 60 60 42 42 21
2 100 40 40 74 32 16
3 125 25 25 98 24 12
4 137 12 12 106 18 9
5 139 5 5 120 14 7
6 141 2 2 123 12 6
Optimal choice - Ordinal approach
• A rational consumer tries to attain the highest possible indifference
curve, given the budget line. This occurs at the point where the
indifference curve is tangent to the budget line (point E).
i.e. The slope of the indifference curve (𝑀𝑅𝑆𝑋,𝑌 ) is equal to the slope of the budget line (𝑃𝑋 𝑃𝑌 ).
𝑀𝑅𝑆𝑋,𝑌 = 𝑀𝑈𝑋 𝑀𝑈𝑌 = 𝑃𝑋 𝑃𝑌
 Optimal choice - cardinal approach
Example 1: A consumer consuming two commodities, X and Y, has the
utility function U X, Y = XY + 2X. The prices of the two commodities
are 4 birr and 2 birr respectively. The consumer has a total income of
60 birr to be spent on the two goods.
a) Find the utility maximizing quantities of good X and Y.
b) Find 𝑀𝑅𝑆𝑋,𝑌 at equilibrium.

Example 2: Given a utility function U X, Y = XY, and the price of the

two goods 2 birr and 4 birr respectively, and income of the consumer
300 birr, find the quantities of X and Y that should be consumed to
maximize utility.
 Assignment
• Show effect of an increase in price of a
normal, inferior and giffen good.
 30.3 Derivation of an individual demand curve

• Assume the price of y is now reduced to $1; the price of x and the income
remain unchanged. MU/P can now be calculated again for product y.

ACTIVITY 30.3
1. justify the new consumer equilibrium.
2. What is the new consumer equilibrium?
3. Calculate the increase in total utility.
4. How would you derive a more comprehensive demand curve?
Derived individual demand curve for product y
 Causes of a shift in the budget line
If there is a change in the price of one good,
Eg., if the price of X falls, then
with income remaining unchanged, then the more of this good can be purchased
budget line will pivot. at all levels of income.
Eg. if the price of X falls by half, then 40 of X The budget line moves outwards,
can now be purchased with an income of from its pivot at point A.
$200.
As price of X has fallen relative to that of Y,
which is unchanged, consumers will substitute
X for Y (substitution effect of a price change).
It is always the case that the rational
consumer will substitute towards the good
which has become relatively cheaper.

With the fall in the price of X, the consumer

actually has more money to spend on other
goods, X included. Real income has therefore
increased, which may mean that a consumer
may now purchase even more of good X
(income effect of a price change).
 The effect of a change in income on the
consumption of goods X and Y
• A consumer’s choice is optimal at
the point where the budget line
touches/is at a tangent to, the
highest indifference curve
(i.e. E1 given B1).
• If income increases (budget
constraint rises to B2) then more
of each good will usually be
consumed (increase consumption
of good Y and also of good X,
albeit to a lesser extent.
(E2 is the new optimal position).
• The change in position from E1 to E2 is what occurs when
both goods are normal goods.
• If the increase in income/budget constraint results in less of
one good being consumed then this is indicative that this
good is an inferior good.
When there is a fall in consumer income, the budget line shifts
downwards in a parallel way. This indicates that both goods are
normal and that less of each will be consumed. In the case of an
inferior good, there will be an increase in the consumption of
this good.
 31.3 The income and substitution effects of a
price change

Eg. when there is an increase in price

of a normal good.
If Px increases, consumers have less
spending power. The loss of spending
power is represented by a new
budget line B2.
The price of good Y is unchanged,
which is why B2 pivots downwards
towards the origin, indicating that
less of good X can now be consumed
with the same level of income.
• The two stages the change:
– Substitution effect
– Income effect
Eg. when there is an increase in price of a normal good.
• A movement along E1 to point E2 (the
substitution effect, i.e the consumer
buys less of X as it is now relatively more
expensive than Y).
• A shift downwards to a lower
indifference curve I2 moving from E2 to
E3 (the income effect, i.e. the consumer
has less spending power due to the
increase in price of X).
The income effect is negative, resulting in a
decrease in consumption of both goods
The income effect has been eliminated by
removing the reduction in real income
through including an imaginary budget line
that is parallel to the new budget line but at
a tangent to the original indifference curve.
 The substitution and income effects when
there is a decrease in the price of good X.
• The consumer is in equilibrium at E1.
• A fall in the price of good X is
equivalent to a rise in real income;
the budget line pivots to B2.
• The substitution effect is the move
from E1 to E2 where more of good X
is now being consumed.
• The income effect is positive and
involves the move from E2 to E3 as
the consumer reaches a higher
indifference curve through a further
increase in consumption of good X.
The case of good X being an inferior good.

• The point about good X in

this case is that as real
income increases,
consumers will substitute
more expensive, better
quality goods for good X. As
a consequence, the income
effect is negative but not
enough to outweigh the
substitution effect.
• With a Giffen good, demand falls as the price ACTIVITY 31.3
of the good falls and demand increases as the
Assume good X is a Giffen good.
price increases.
Re-draw the diagram to show the
For low-income families, this could be a staple
substitution and income effects
food such as rice or wheat flour. As price
increases, consumption will increase since real
when the price of good X falls.
income has fallen. More rice or wheat flour is now (Hint: you need to move point E3
being consumed instead of other types of food. further left).

The demand curve is upward sloping as income

effect is negative and greater than the
substitution effect.
• Alternatively, when the price of an essential
food item decreases, demand for this good
falls as real income has now increased. The
individual has more to spend on other things
as the food item takes up a large part of their
small income.
 Note
• The substitution effect is always positive; the
income effect can be positive or negative
depending on the type of good.
• The substitution effect is always shown by a
movement along an indifference curve; the
income effect is represented by a shift from
one budget line to another.