Economics, 3rd Edition

I

d

S

b tit

FIGURE 5.15

0

A

B

C

New optimum

Initial optimum

Quantity

of cola

Quantity

of pizza

Substitution effect

Income

effect

Substituion

effect

Income effect

I

1

I

2

Initial

budget

constraint

New budget constraint

SELF TEST 

 Draw a budget constraint and indifference curves for cola and pizza. Show what happens to the 

budget constraint and the consumer’s optimum when the price of pizza rises. In your diagram, decompose the 

change into an income effect and a substitution effect.

price-consumption curve 

a line showing the consumer optimum for two goods as the price of one of the goods 

changes, assuming incomes and the price of the good are held constant

Figure 5.16 represents the relationship between the change in the price of pizza and the quantity 

demanded. The price–quantity relationship is plotted on the lower graph to give the familiar demand curve. 

As the price of pizza falls the quantity demanded rises – the reasons being partly due to the income effect 

and partly to the substitution effect. The theory of consumer choice, therefore, provides the theoretical 

foundation for the consumer’s demand curve, which we first introduced in Chapter 3.

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CHAPTER 5  BACKGROUND TO DEMAND: THE THEORY OF CONSUMER CHOICE  121