Microeconomics: Theory and Applications with Calculus, 4e

4.3 Effects of a Price Increase

Holding tastes, other prices, and income constant, an increase in a price of a good has two effects on an individual’s demand. One is the substitution effect: the change in the quantity of a good that a consumer demands when the good’s price rises, holding other prices and the consumer’s utility constant. If the consumer’s utility is held constant as the price of the good increases, the consumer substitutes other goods that are now relatively cheaper for this now more expensive good.

The other effect is the income effect: the change in the quantity of a good a consumer demands because of a change in income, holding prices constant. An increase in price reduces a consumer’s buying power, effectively reducing the ...