5.19 : The Total Effect of Price Change

Changes in a product's price affect consumers' buying patterns.

In the graph, Point E is John's equilibrium when the price of clothing is twenty dollars per unit. Here, his original budget line, BL1, intersects the indifference curve IC1, where he purchases seven units of clothing every week.

When the price of clothing falls to ten dollars per unit, BL1 rotates towards a new point, L2, becoming his new budget line, BL2. It intersects the indifference curve IC2 at point F. This point F becomes John's new equilibrium point, where he purchases fifteen units of clothing.

Because of the decrease in the price of clothing, the quantity purchased increased by eight units. This change in quantity demanded of a good due to a change in its price is called the price effect or the total effect.

The total effect helps to understand the substitution effect caused by changes in relative prices, and the income effect reflects changes in purchasing power for meals and clothing caused by the change in relative prices.