Figure10A-18Income and Substitution Effects The movement from Ingrid’s original optimal consumption bundle when the price of rooms is $150, A, to her new optimal consumption bundle when the price of rooms is $600, C, can be decomposed into two parts. The movement from A to B—the movement along the original indifference curve, I₂, as relative price changes—is the pure substitution effect. It captures how her consumption would change if she were given a hypothetical increase in income that just compensates her for the increase in the price of rooms so that her total utility is unchanged. The movement from B to C, the change in consumption when we remove that hypothetical income compensation, is the income effect of the price increase—how her consumption changes as a result of the fall in her purchasing power.