3 If the price of a normal good falls, what happens to the quantity demanded of that good? For a normal good, a fall in price always increases the quantity bought. We can prove this assertion by dividing the price effect into two parts:

◆ The substitution effect

◆ The income effect Figure 8.9

(a) shows the price effect and Figures 8.9(b)

and 8.9

(c) divide the price effect into its two parts.

Substitution Effect The substitution effect is the effect of a change in price on the quantities bought when the consumer (hypothetically)

remains indifferent between the original and the new combinations of goods consumed. To work out Lisa’s substitution effect, when the price of a film falls, we cut her income by enough to leave her on the same indifference curve as before.