FIGURE 9 A Change in Price When the price of Pepsi
falls, the consumer’s budget
constraint shifts outward
and changes slope. the
consumer moves from the
initial optimum to the new
optimum, which changes
her purchases of both pizza
and Pepsi. In this case, the
quantity of Pepsi consumed
rises, and the quantity of
pizza consumed falls.
Quantity of Pizza 100
Quantity of Pepsi 1,000
500
0
B
D
A
New optimum
I 1
I 2
Initial optimum
New budget constraint
Initial
budget
constraint
1. A fall in the price of Pepsi rotates
the budget constraint outward . . .
3. . . . and
raising Pepsi
consumption.
2. . . . reducing pizza consumption . . .
income effect the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve substitution effect the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution 65875_ch21_ptg01_433-460.indd 446
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