Income and Substitution Effects To decompose the total effect of a price change into the income and substitution effects, shift the new budget constrant back until it is just tangent to the old indifference curve (at H).
The substitution effect is given by change in consumption along the old indifference curve from the “Old optimum” to point H. The income effect is given by the change in consumption from point H to the “New optimum.”
The substitution effect is given by change in consumption along the old indifference curve from the “Old optimum” to point H. The income effect is given by the change in consumption from point H to the “New optimum.”