Substitution and Income Effects

Start at and change the price of good 1. The change splits into the substitution effect along the old indifference curve to , where its slope equals the new price ratio, and the income effect to on the new budget line. The two-step split is bookkeeping: as changes gradually, both effects happen at once.

• Press ▶ Step by step: first , then .
• Press ▶ Lower p₁ smoothly, then drag : at every point the blue and red arrows add up to the black one, the direction of the path.
• Press Giffen good: good 1 is so inferior that the income effect wins, and she buys less of it when it gets cheaper.